External Influences and Institutional Constraints on UK Monetary Policy, 1985-2000

Christopher Adam (), David Cobham and Eric Girardin
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Eric Girardin: Méditerranée, Aix-Marseille II

Discussion Paper Series, Department of Economics from Department of Economics, University of St. Andrews

Abstract: We examine the role and nature of external influences (US as well as German) and changing institutional constraints upon UK monetary policy by estimating Taylor-type reaction functions for three subperiods: 1985-90 (pre-ERM), 1992-97 (post-ERM) and 1997-2000 (MPC). We identify and contrast 'domestic' and 'international' models of the reaction function, and show that while the international model dominates for the first subperiod, a joint model dominates for the post-ERM, and a domestic model in which foreign interest rates function only as instruments dominates for the MPC period. We use these models to comment on the short ERM period, when the authorities reduced interest rates further and faster than they would have done on the basis of the pre-ERM rule, but less than on the post-ERM or MPC (or standard Taylor) rules. We interpret our findings as showing that it is the institutional changes (towards central bank independence) rather than changes in the external regime which have been decisive in the development of UK monetary policy in this period.

Keywords: monetary policy; reaction function; interest rates; exchange rates. (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-pke
Date: Written
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