Modelling Monetary Policy: Inflation Targeting in Practice

2004/05/01 by Christopher Martin, Costas Milas
Economics, Econometrics and Finance · #Monetary Policy and Economic Impact #Fiscal Policies and Political Economy #Economic, financial, and policy analysis

paper · doi:10.1111/j.0013-0427.2004.00366.x

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.

Related

• Monetary Institutions, Partisanship, and Inflation Targeting
• Inflation targeting strategy and its credibility
• Inflation target credibility and the Taylor rule
• The impact of the central bank's adoption of inflation targeting on actual inflation based on the GMM model
• Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature