Essays in Honour of Charles Goodhart, Volume One
Edited by Paul Mizen
Chapter 7: UK monetary policy, 1972-97: a guide using Taylor rules
7. UK monetary policy, 1972–97: a guide using Taylor rules Edward Nelson* 1. INTRODUCTION In the period from the ﬂoating of the exchange rate in June 1972 to the granting of operational independence to the Bank of England in May 1997, UK monetary policy went through several regimes. These included the period in the 1970s when monetary policy was considered subordinate to incomes policy as the government’s primary weapon against inﬂation; an emphasis on monetary targeting in the late 1970s and early 1980s; moves from 1987 toward greater management of the exchange rate, culminating in the UK’s membership of the Exchange Rate Mechanism (ERM) from 1990 to 1992; and inﬂation targeting from October 1992.1 For the United States it has been shown by Taylor (1993) that Federal Reserve policy behaviour is well described by a simple rule relating the short-term nominal interest rate to inﬂation and the gap between actual and potential output. There has subsequently been an explosion of theoretical and empirical work on Taylor rules, including econometric estimates of rule coeﬃcients for the US by Clarida, Galí, and Gertler (2000) and Judd and Rudebusch (1998). This paper provides estimates of the Taylor rule for the UK over several diﬀerent monetary policy regimes over 1972–97. It is not claimed that policy-makers actually adhered to a Taylor rule during any part of this period; rather, the Taylor rule estimates provided here can be regarded as a simple (two or three parameter) characterisation of...
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