An overhaul of doctrine: the underpinning of U.K. inflation targeting

Edward Nelson

No 2007-026, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper argues that the inflation targeting regime prevailing in the United Kingdom is not the result of a change in policymaker objectives. By conducting an analysis of U.K. policymakers that parallels Romer and Romer?s (2004) study of Federal Reserve Chairmen, I demonstrate that policymaker objectives have been essentially unchanged over the past five decades. Instead, the crucial underpinning of U.K. inflation targeting has been an overhaul of doctrine?a changed view of the transmission mechanism. This overhaul can be understood in terms of changes in policymakers? views on the values of a few key parameters in their specifications of the economy?s IS and Phillips curves. Specifically, the changed views pertain to the issues of whether interest rates enter the IS equation, and the extent of policymaker influence on those rates; whether the level of the output gap appears in the Phillips curve when the gap is negative; and whether a speed-limit term matters for inflation dynamics. Contrary to conventional wisdom, changing views on the expected-inflation term in the Phillips curve do not play a role.

Keywords: Inflation (Finance) - Great Britain; Monetary policy - Great Britain (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: An Overhaul of Doctrine: The Underpinning of UK Inflation Targeting (2009)
Journal Article: An Overhaul of Doctrine: The Underpinning of UK Inflation Targeting (2009)
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