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Central Banking, Monetary Theory and Practice

Essays in Honour of Charles Goodhart, Volume One

Edited by Paul Mizen

Celebrating the contribution that Charles Goodhart has made to monetary economics and policy, this unique compendium of original papers draws together a highly respected group of international academics, central bankers and financial market regulators covering a broad range of issues in modern monetary economics. Topics discussed include: central bank independence; credibility and transparency; the inflation forecast and the loss function; monetary policy experiences in the US and the UK; the implications of Goodhart’s Law; the benefits of single versus multiple currencies; and money, near monies and credit.
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Chapter 7: UK monetary policy, 1972-97: a guide using Taylor rules

Edward Nelson


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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