Modelling Monetary Policy: Inflation Targeting in Practice

Abstract

This paper estimates a simple structural model of monetary policy in the UK focusing on the policy of inflation targeting introduced in 1992. We find that: (i) the adoption of inflation targeting led to significant changes in monetary policy; (ii) post-1992 monetary policy is asymmetric as policy-makers respond more to upward deviation of inflation away from the target; (iii) post-1992 policy-makers may be attempting to keep inflation within the 1.4%-2.6% range rather than pursuing a point target of 2.5% and (iv) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target.

Forecasting monetary policy rules in South Africa

“…We employ a popular regression-type model, namely, the partially linear model of Robinson (1988) 4 Note that in these models the response of interest rates to the lagged interest rate is linear, and that nonlinear policy rules can be de…ned using the output gap or the …nancial index as possible transition variables in the weight function (4). Alternatively, one can use the quadratic logistic function as in Martin and Milas (2004). The advantage of this nonlinear form is that it allows for an in ‡ation zone targeting regime.…”

Monetary policy before and after the euro: evidence from Greece

“…In this paper we focus on one of the small EMU economies, Greece, whose pre-and post-euro inflation and growth performance are markedly different from those of Germany. Our analysis extends the one by HH as it also allows for the more complex monetary policy decision-making process accounting for output gap effects such as those identified by Bec et al (2002) and Surico (2003Surico ( , 2006) captured using non-linear models such as those used in Martin and Milas (2004).…”

“…We now estimate three non-linear models similar to those in Martin and Milas (2004) capturing output gap effects in monetary policy. 21 First we estimate the Logistic…”

“…Our analysis involves three steps. First, we model Greek monetary policy using linear and nonlinear reaction functions such as those estimated by Martin and Milas (2004) 4 and use our findings to assess G reek monetary policy in the 1990s. Second, we replicate the counterfactual experiment of HH simulating post-euro Greek interest rates under a 4 hypothetical BOG regime.…”

Testing for Asymmetries in the Preferences of the Euro-Area Monetary Policymaker

“…Most of this research has focused on the estimation of non-linear policy reaction functions (for a variety of samples and with a variety of non-linear specifications) exploiting the well-known result that if an asymmetry in central bank F o r P e e r R e v i e w 5 preferences exists, then the optimal policy rule is non-linear -see Bec et al (2002), Kim et al (2005), Cukierman and Muscatelli (2002), Martin and Milas (2004), Karagedikli and Lees (2004), and Bruinshoofd and Candelon (2005).…”