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Financial Crises and Monetary Policy: Evidence from the UK

  • Christopher Martin

    ()

    (Department of Economics, University of Bath, UK)

  • Costas Milas

    ()

    (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis (RCEA), Italy; Erastinis, Greece)

We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a “financial crisis” regime in which policy rates respond strongly to financial stress and a “no-crisis” Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 14_11.

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Date of creation: Feb 2011
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Handle: RePEc:rim:rimwps:14_11
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  1. Fuchun Li & Pierre St-Amant, 2010. "Financial Stress, Monetary Policy, and Economic Activity," Staff Working Papers 10-12, Bank of Canada.
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  4. Stephen G. Cecchetti & Lianfa Li, 2008. "Do Capital Adequacy Requirements Matter For Monetary Policy?," Economic Inquiry, Western Economic Association International, vol. 46(4), pages 643-659, October.
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  6. Teranishi, Yuki, 2012. "Credit spread and monetary policy," Economics Letters, Elsevier, vol. 114(1), pages 26-28.
  7. Freixas, X. & Martin, A. & Skeie, D., 2010. "Bank Liquidity, Interbank Markets, and Monetary Policy," Discussion Paper 2010-35S, Tilburg University, Center for Economic Research.
  8. Jan Willem Slingenberg & Jakob de Haan, 2011. "Forecasting Financial Stress," DNB Working Papers 292, Netherlands Central Bank, Research Department.
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  11. Stephanie Schmitt-Grohé & Martín Uribe, 2010. "Liquidity Traps: An Interest-Rate-Based Exit Strategy," NBER Working Papers 16514, National Bureau of Economic Research, Inc.
  12. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, vol. 123(571), pages 906-931, 09.
  13. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  15. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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