On Inflation Targeting in the United Kingdom

Abstract

This paper discusses some of the operational issues relevant to inflationtargeting in the United Kingdom, in particular: whether inflation targeting is 'new'; whether it is potentially destabilising; and whether it requires too much knowledge on the part of the authorities. It goes on to discuss the role of inflation forecasts in general, and inflation probability distributions in particular, in the context of inflation-targeting in the UK. It also discusses the role of transparency in such a regime, and provides some evidence on its effect.

Inflation Targeting as a Monetary Policy Rule

“…This is an example of an implicit reaction function, since both the long interest rate and the in ‡ation forecast are forward-looking and depend on the reaction function itself. 14 A variant of (2.15), 16) where the instrument responds directly to deviations of the rule-consistent in ‡ation forecast from the in ‡ation target, is discussed in Haldane [49], and further examined in Haldane and Batini [50] and Rudebusch and Svensson [83]. These implicit reaction functions would be examples of implicit instrument rules, if they were prescribed guides for monetary policy.…”

“…49 A crucial issue then is the extent to which aggregate demand and supply relations change with the introduction of the new currency. One possibility is to think in terms of national transmission mechanisms, that is, with a common short nominal interest rate but di¤erent aggregate demand and aggregate supply relations in each country, giving rise to national in ‡ation and output gaps (obviously with strong spill-over e¤ects between countries, e¤ects that should be stronger with a common currency).…”

Inflation Targeting: What Can the ECB Learn From the Recent Experience of the Bank of England?

“…Private sector forecasts provide a judgement about the future path of in¯ation, the central bank's own forecast ability and the private sector perception of the need for a change in present policy. Haldane (1998) reproduces charts from the February 1996 In¯ation Report which show the Bank of England's RPIX forecasts consistently below the median market forecast and more often than not outside the inter-quartile range. This suggests that the Bank is less pessimistic than the private sector about in¯ation, and more likely to suggest policy is correctly set to keep in¯ation`on track'.…”

“…The view put forward by Britton, Fisher and Whitley (1998) is that no summary measure is adequate. Haldane (1998) argues that the best results will be obtained from a mixture of measures from many models that include`off-model' information allowing for in¯ationary risks and potential regime shifts.…”

Inflation Targeting in Practice: A Survey

“…Once inflation was reduced, both countries set up the target in 5 years. In the UK (Haldane, 1998;Blejer, 2000) the horizon was first set up until the end of the parliamentary term (mid 1997) with a band of 1-4%. In Australia the horizon was the length of the business cycle.…”