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Measuring the Policymaker’s Credibility: The Bank of England in ‘nice’ and ‘not-so-nice’ times

Author

Listed:
  • Iris Biefang-Frisancho Mariscal

    (University of the West of England, Bristol)

  • Woon Wong

    (University of the West of England, Bristol)

  • Peter Howells

    () (University of the West of England, Bristol)

Abstract

In the course of the last year or so, the Bank of England has come under pressure to raise interest rates on the grounds that a ‘lax’ monetary policy in the face of persistent overshoots of the inflation target risks undermining the Bank’s hard-won credibility. Using the Bayesian as well as time-varying coefficient Kalman-Filter techniques, and four different measures of inflation expectations, this paper looks at the effect of recent events upon the Bank of England’s credibility. Briefly, we find that on most measures of inflation expectations the credibility built up during the relatively benign years from the adoption of an explicit inflation target in 1992 to the onset of the financial crisis in 2007 has deteriorated since. Although our investigation is focused in this paper on the Bank of England, it is easily transferred to the examination of other central banks and represents an advance on other measures of credibility widely used in the existing literature.

Suggested Citation

  • Iris Biefang-Frisancho Mariscal & Woon Wong & Peter Howells, 2011. "Measuring the Policymaker’s Credibility: The Bank of England in ‘nice’ and ‘not-so-nice’ times," Working Papers 20111110, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  • Handle: RePEc:uwe:wpaper:20111110
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    File URL: http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/economics/1110_Measuring_credibility_v10.pdf
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    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
    2. Breedon, Francis & Hume, Michael, 2007. "Does the European Central Bank have a credibility problem?," Economics Letters, Elsevier, vol. 95(3), pages 438-442, June.
    3. Demir, Banu & Yigit, Taner M., 2008. "Announcements and credibility under inflation targeting," Economics Letters, Elsevier, vol. 100(2), pages 249-253, August.
    4. Timothy Besley & Kevin Sheedy, 2010. "Monetary Policy Under Labour," National Institute Economic Review, National Institute of Economic and Social Research, vol. 212(1), pages 15-33, April.
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    Cited by:

    1. repec:eee:riibaf:v:41:y:2017:i:c:p:37-53 is not listed on IDEAS
    2. Flávio de Freitas Val & Wagner Piazza Gaglianone & Marcelo Cabus Klotzle & Antonio Carlos Figueiredo Pinto, 2017. "Estimating the Credibility of Brazilian Monetary Policy using Forward Measures and a State-Space Model," Working Papers Series 463, Central Bank of Brazil, Research Department.

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