Uncovering the implicit short-term inflation target of the Bank of England

Sheng Zhu, Ella Kavanagh and Niall O'Sullivan

International Economics, 2021, vol. 167, issue C, 120-135

Abstract: We re-investigate the traditional thinking of a fixed inflation target within an inflation-targeting central bank, the Bank of England (BOE). Drawing on extensive readings of the BOE's publications, we investigate whether, in addition to setting the officially announced inflation target based on its medium to long-term considerations, the BOE has short-term inflation targets that periodically differ from its medium-term objective. By estimating a New Keynesian model, we uncover that the Monetary Policy Committee of the BOE set short-term targets while gradually bringing inflation to the announced medium-term inflation objective. We also find that the Bank of England's short-term inflation target helps to explain the inflation path in the UK and the periodic and sustained movements in inflation away from its official target. This implicit short-term inflation target was time-varying in response to exogenous shocks, cost-push shocks and technology shocks.

Keywords: Inflation target; New Keynesian (search for similar items in EconPapers)
JEL-codes: C12 E31 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:167:y:2021:i:c:p:120-135

DOI: 10.1016/j.inteco.2021.06.006

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