Abstract
Abstract The UK historical monetary policy experience is rich of institutional changes, but it remains unclear which of these many events dominated the policy actions and what timing characterised the inception of different policy regimes. We develop a new empirical approach to answer these questions and we identify in particular the historical institutional events that effectively translated into a shift of the systematic actions of the UK monetary authorities. We find that not all institutional events triggered a contemporaneous change in the actual policy conduct, although a coherent evolution in phases is evident since 1978, when a significant monetary policy rule emerges. These occasional but not sporadic regime changes explain a considerable share of the movements in the official interest rate, as well as an overstatement of the importance of policy inertia.
Highlights
The importance of having an accurate description of the historical evolution of monetary policy in a country is widely recognised in the macroeconomic literature
Main empirical findings: 1) many important historical events were not accompanied by a simultaneous shift in policy behaviour; 2) a clear evolution of the priorities of the monetary authorities emerges with inflation goals in particular becoming gradually more important from the 1970s up to early 2000s, and the output gap dominating after the 2008 financial crisis; 3) regime changes intended as shifts in the systematic actions of the monetary authorities explain a considerable share of the observed movements in the official interest rate, while disregarding such regime changes leads to an overestimation of the importance of policy inertia
The data we use for our estimation have quarterly frequency, from 1972Q3 to 2016Q2, and consist of: the annual inflation rate calculated using the last month of the quarter of the Consumer Price Index (CPI); the official interest rate that the Bank of England charges on secured overnight lending; the shadow bank rate calculated by Wu and Xia (2016); the interest rate on the three-month Treasury Bills; the output gap, calculated as the residuals from the regression of real Gross Domestic Product (GDP) in logarithms on a deterministic linear-quadratic trend. 18,19
Summary
The importance of having an accurate description of the historical evolution of monetary policy in a country is widely recognised in the macroeconomic literature. To reflect their different scope, we distinguish: important institutional events that are very likely to have influenced the overall monetary policy strategy (broad institutional changes); modifications that involved more operational aspects of the monetary policy decisions (technical modifications); and particular circumstances in the world economy (international events) This long list of events highlights one aspect that the existing empirical work has not fully addressed, which is the difficulty in dating, based only on a priori information, the periods in which the systematic actions of the monetary authorities were effectively different. We explore the existence of changes in the systematic actions of the monetary authorities With this objective we perform a comprehensive investigation of the parameter shifts in a standard monetary policy instrument rule, addressing in particular the problems produced by the presence of forward-looking variables and the possibility of structural changes in marginal distributions, two issues that can confound the whole estimation and inference on parameter change (Hansen 2000). We employ a modified version of the testing approach suggested by Inoue and Rossi (2011) to estimate the unstable subset of parameters
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
