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Interest rate setting and inflation targeting : evidence of a nonlinear Taylor rule for the United Kingdom

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Taylor, Mark P. and Davradakis, Emmanuel. (2006) Interest rate setting and inflation targeting : evidence of a nonlinear Taylor rule for the United Kingdom. Studies in Nonlinear Dynamics & Econometrics, Vol.10 (No.4). ISSN 1558-3708

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Official URL: http://dx.doi.org/10.2202/1558-3708.1359

Abstract

We examine potential nonlinear behaviour in the conduct of monetary policy by the Bank of
England. We find significant nonlinearity in this policy setting, and in particular that the standard
Taylor rule really only begins to bite once expected inflation is significantly above its target. This
suggests, for example, that while the stated objective of the Bank of England is to pursue a symmetric
inflation target, in practice some degree of asymmetry has crept into interest-rate setting.
We argue that, nevertheless, the very predictability of the policy rule, especially when set out in a
highly plausible and intuitive nonlinear framework, is perhaps one reason why the United Kingdom
has, since the early 1990s, enjoyed price stability combined with relatively strong growth.

Item Type:

Journal Article

Subjects:

H Social Sciences > HB Economic Theory

Divisions:

Faculty of Social Sciences > Economics

Library of Congress Subject Headings (LCSH):

Taylor's rule, Interest rates -- Great Britain, Great Britain -- Monetary policy

Journal or Publication Title:

Studies in Nonlinear Dynamics & Econometrics

Publisher:

Berkeley Electronics Press

ISSN:

1558-3708

Official Date:

2006

Dates:

Date	Event
2006	UNSPECIFIED

Volume:

Vol.10

Number:

No.4

Identification Number:

10.2202/1558-3708.1359

Status:

Peer Reviewed

Access rights to Published version:

Open Access

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