Has More Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics

This paper is an empirical investigation into the question of whether increased independence affects central bank behavior, in particular when monetary policy is already in an inflation targeting regime. We take advantage of the unique experience in that sense of the United Kingdom, where the Bank of England was granted operational independence from Her Majesty's Treasury only in May 1997, while inflation targeting had been implemented since October 1992. Our strategy is to estimate Taylor rules employing alternative specifications, econometric methods and variable proxies in search for robust results that survive most of those modifications. The key lesson we extract from UK quarterly data is that the Bank of England has responded to the output gap, and not at all to output growth, the more so after receiving operational independence, when the gap has been positive or close to zero and inflation credibly stabilized at target. We find no unambiguous evidence for any definite change in the Bank's reaction to inflation or in the degree of its interest rate smoothing. Our main import is to argue that both the asymmetry of the monetary policy reaction function across the cycle and the response to the output gap, not growth, are fully consistent with New Keynesian theory, especially under inflation targeting. Anchored inflation and economic expansion during the post-independence period thus complement greater autonomy in influencing the behavior of the Bank of England, yet clear separation of the individual contribution of each of these effects appears challenging given our short sample.

Exchange Rate Pass-Through on Prices in Macrodata: A Comparative Sensitivity Analysis

The paper compares exchange rate pass-through on aggregate prices in the US, Germany and Japan across a number of dimensions. Building on the empirical approaches in the recent literature, our contribution is to perform a thorough sensitivity analysis of alternative pass-through estimates. We find that the econometric method, data frequency and variable proxy employed matter for the precision of details, yet they often agree on some general trends. Thus, pass-through on import prices has declined in the 1990s relative to the 1980s, pass-through on export prices remains country-specific and pass-through on consumer prices is nowadays negligible in all three economies we consider.

Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics

We investigate whether increased independence affects central bank behavior when monetary policy is already in an inflation targeting regime. Taking advantage of the recent UK experience to identify such an exogenous change, we estimate Taylor rules via alternative methods, specifications and proxies. Our contribution is to detect two novel results: the Bank of England has responded to the output gap, not growth; and in a stronger way after receiving operational independence. Both findings are consistent with the Bank's mandate and New Keynesian monetary theory. Economic expansion and anchored inflation have thus complemented greater autonomy in influencing the Bank's policy feedbackasymmetry of monetary policy reaction function across the business cycle, response to output gap vs output growth, Taylor rules, operational independence, inflation targeting, United Kingdom

Effects of the Exchange-Rate Regime on Trade under Monetary Uncertainty: The Role of Price Setting

In a baseline stochastic new open-economy macroeconomics (NOEM) model which parallels alternative invoicing conventions, namely consumer's currency pricing (CCP) vs. producer's currency pricing (PCP), we revisit the question whether the exchange-rate regime matters for trade. We show analytically that under full symmetry, only money shocks and separable but otherwise very general utility, it is irrelevant in affecting expected trade-to-output ratios. A peg-float comparison is nevertheless meaningful under PCP, although not CCP, in terms of volatility of national trade shares: by shutting down the pass-through and expenditure-switching channel, a peg then stabilizes equilibrium trade-to-GDP at its expected level.

Independence and Accountability of Monetary and Fiscal Policy Committees

The democratic accountability of policymaking institutions which are autonomous within delegated mandates has not received as much attention as their independence. We analyze in a theoretical model the effects of accountability in the form of possible overriding of economic policy decisions by the government under different degrees of independence of expert committees conducting monetary and fiscal policy. The equilibrium outcomes of such alternative institution-design frameworks are compared according to key macroeconomic performance criteria. Our results stress the trade-off between anchoring inflation expectations on target and output stabilization that is not solved with accountability. --Independence,accountability,monetary policy,fiscal policy,expert committees,institution design

Classifying Monetary Economics: Fields and Methods from Past to Future

We propose a simple, yet sufficiently encompassing classification scheme of monetary economics. It comprises three fundamental fields and six recent areas that expand within and across these fields. The elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature, neither is this an attempt to produce a relatively complete systematization. Our intention in taking stock is not finality or exhaustiveness. We rather suggest a viewpoint and a possible ordering of the accumulating knowledge. Our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large.monetary economics, monetary theory, monetary policy, public finance, classification, methodology

Intergenerational Transmission of Inflation Aversion: Theory and Evidence

We study the evolution of inflation aversion preferences across generations. In the theoretical part of the paper, we analyze the dynamics of such preferences in an overlapping-generations model with heterogenous mature agents characterized by different degrees of inflation aversion. We show how the stability of a society’s degree of inflation aversion depends on the strength and speed of changes in the structure of the population. The empirical part then proposes two applications in support of the theoretical results. We first link demographic structures to inflation aversion, and then proceed by looking at the relations between income (in)equality and measures of inflation aversion.Intergenerational transmission, evolving preferences, inflation aversion, central bank independence, demographic change, income inequality

Independence and Accountability of Monetary and Fiscal Policy Committees

The democratic accountability of policymaking institutions which are autonomous within delegated mandates has not received as much attention as their independence. We analyze in a theoretical model the effects of accountability inthe form of possible overriding of economic policy decisions by the government under different degrees of independence of expert committees conducting monetary and fiscal policy. The equilibrium outcomes of such alternative institution-design frameworks are compared according to key macroeconomic performance criteria. Our results stress the trade-off between anchoring inflation expectations on target and output stabilization that is not solved with accountability.independence, accountability, monetary policy, fiscal policy, expert committees, institution design