The optimal neglect of inflation: an alternative interpretation of UK monetary policy during the “Great Moderation”
This paper argues that UK monetary policymakers did not respond to the inflation rate during most of the “Great Moderation” that ran from the early 1990s to the mid-2000s. We derive a generalisation of the New Keynesian Phillips curve in which inflation is a nonlinear function of the output gap and show that the optimal response of the policy rule to inflation depends on the slope of the Phillips curve; if this is flat, manipulation of aggregate demand through monetary policy does not affect inflation and so policymakers cannot affect inflation. We estimate the monetary policy rules implied by a variety of alternative Phillips curves; our preferred model is based on a Phillips curve that is flat when output is close to equilibrium. We find that policy rates do not respond to inflation when the output gap is small, a situation that characterised most of the “great moderation” period.
Year of publication: |
2010-12
|
---|---|
Authors: | Boinet, V ; Martin, Christopher |
Publisher: |
Elsevier |
Saved in:
Saved in favorites
Similar items by person
-
How To Avoid Self-fulfilling Crises
Boinet, V, (2002)
-
Price formation in an open economy : theory and evidence for the United Kingdom, 1951 - 1991
Martin, Christopher Ian, (1997)
-
Corporate borrowing and credit constraints : structural disequilibrium estimates for the UK
Martin, Christopher Ian, (1990)
- More ...