Time Horizons And Smoothing In the Bank of England's Reaction Function: The Contrast Between The Standard GMM And Ex Ante Forecast Approaches

David Cobham and Yue Kang

No 1208, Heriot-Watt University Economics Discussion Papers from Department of Economics, School of Management and Languages, Heriot Watt University

Abstract: The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach.

Date: 2012
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Journal Article: Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches (2013)
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