Essays in Honour of Charles Goodhart, Volume One
Edited by Paul Mizen
of ‘UK monetary policy, 1972–97: a guide using Taylor rules’ Paul Mizen The focus of the chapter is the observation by Taylor (1993) that monetary policy setting relates to the short-term nominal interest rate not the growth of monetary aggregates, and that historically in the US, and for many other countries (c.f. Clarida, Galí and Gertler, 1998), the reaction function is a remarkably simple relation in three explanatory variables, the interest rate, the inﬂation rate and the gap between actual and potential output. In relation to this literature, Ed Nelson has put together an illuminating analysis of monetary policy that makes two very useful contributions to the literature. First, the chapter illustrates that once again Charles Goodhart was a vital contributor to the development of a new research ﬁeld, which in this case was the literature on policy reaction functions with the short-term nominal interest rate as the instrument. The chapter shows that in the late 1980s Goodhart was drawing on his experience within the Bank of England to bring monetary theory and analysis back towards the realities of monetary operations and practice. This entailed dispensing with the myths that monetary growth-based reaction functions and interest-rate targets were the basis for central bank policy. He explained that enlightened use of the interest rate had been addressed towards the intermediate targets of the day, whether they were growth rates of key monetary aggregates, the exchange rate, or inﬂation. Nelson’s approach for the period before 1985 and after recognises...
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