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External Influences and Institutional Constraints on UK Monetary Policy, 1985-2000

Author

Listed:
  • Christopher Adam

    (Oxford)

  • David Cobham
  • Eric Girardin

    (Méditerranée, Aix-Marseille II)

Abstract

We examine the role and nature of external influences (US as well as German) and changing institutional constraints upon UK monetary policy by estimating Taylor-type reaction functions for three subperiods: 1985-90 (pre-ERM), 1992-97 (post-ERM) and 1997-2000 (MPC). We identify and contrast 'domestic' and 'international' models of the reaction function, and show that while the international model dominates for the first subperiod, a joint model dominates for the post-ERM, and a domestic model in which foreign interest rates function only as instruments dominates for the MPC period. We use these models to comment on the short ERM period, when the authorities reduced interest rates further and faster than they would have done on the basis of the pre-ERM rule, but less than on the post-ERM or MPC (or standard Taylor) rules. We interpret our findings as showing that it is the institutional changes (towards central bank independence) rather than changes in the external regime which have been decisive in the development of UK monetary policy in this period.

Suggested Citation

  • Christopher Adam & David Cobham & Eric Girardin, 2001. "External Influences and Institutional Constraints on UK Monetary Policy, 1985-2000," Discussion Paper Series, Department of Economics 200116, Department of Economics, University of St. Andrews.
  • Handle: RePEc:san:wpecon:0116
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    File URL: http://www.st-andrews.ac.uk/~wwwecon/papers/dp0116.pdf
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    References listed on IDEAS

    as
    1. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters,in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    monetary policy; reaction function; interest rates; exchange rates.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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