Operational independence, inflation targeting, and UK monetary policy

Abstract

This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one -according to our real-time data set -in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration.

MetaTaylor Rules for theUKandAustralia; Accommodating Regime Uncertainty in Monetary Policy Analysis Using Model Averaging Methods

“…(), Srinivasan et al . (), Mihailov () and Kharel et al . () provide evidence of a continuing interest in the estimation of Taylor‐rule‐like relationships, focusing on the nature of monetary policy regime change and the role of other influences, beyond inflation and gap measures, to explain interest rate movements over a prolonged period.…”

“…There is a sizeable literature investigating monetary policy through the estimation of Taylor rules in both countries. For the UK, Clarida et al (1998), Nelson (2003, Cukierman and Muscatelli (2008), Martin and Milas (2004), Adam et al (2005), Srinivasan et al (2006), Mihailov (2006) and Kharel et al (2010) provide evidence of a continuing interest in the estimation of Taylor-rule-like relationships, focusing on the nature of monetary policy regime change and the role of other influences, beyond inflation and gap measures, to explain interest rate movements over a prolonged period. In Australia, a significant proportion of the available research has derived from the Reserve Bank itself; de Brouwer and O'Regan (1997), Ball (1998), de Brouwer and Ellis (1998) and de Brouwer and Gilbert (2005.…”

“…Mihailov () makes a similar distinction between the pre‐ and post‐Monetary Policy Committee inflation targeting years.…”

Notas críticas sobre a macroeconomia novo-Keynesiana

“…Regras similares à proposta por Taylor transformaram-se em guia da política monetária no regime de metas inflacionárias, que, tendo sido adotado formalmente em vários países, utiliza a taxa de juros com instrumento de controle da inflação (veja-se Friedman e Kuttner, 1996; King, 1997;Bernanke e Mishkin, 1997;Mihailov, 2006). CRíTICAS À TEORIA NOVO-KEYNESIANA Parece fora de questão que, ao aceitar a não-neutralidade da moeda e o desequilíbrio no curto prazo, os novo-keynesianos deram passos importantes no sentido de aproximar a teoria da realidade, retirando-a da ilha da fantasia novo-clássica, em que "o desemprego voluntário não é um fato ou um fenômeno que deve ser explicado pelos teóricos", mas, ao contrário, "uma construção teórica introduzida por Keynes" (Lucas, 1978: 355).…”

Monetary Policy and Alternative Measures of Inflation: Empirical Evidence for the UK

“…Stable policy rules have previously been estimated for this sample period (Mihailov, 2006;Martin, Milas, 2010). There is also a strong evidence of a change in the monetary policy rule in the UK (and other developed economies) from the summer of 2007 as Central Banks faced the unprecedented challenge of the Global Financial crisis (Martin, Milas, 2013).…”