The optimal neglect of inflation: An alternative interpretation of UK monetary policy during the "Great Moderation"

Virginie Boinet and Christopher Martin

Journal of Macroeconomics, 2010, vol. 32, issue 4, 982-992

Abstract: This paper argues that UK monetary policymakers did not respond to the inflation rate during most of the "Great Moderation" that ran from the early 1990s to the mid-2000s. We derive a generalisation of the New Keynesian Phillips curve in which inflation is a non-linear function of the output gap and show that the optimal response of the policy rule to inflation depends on the slope of the Phillips curve; if this is flat, manipulation of aggregate demand through monetary policy does not affect inflation and so policymakers cannot affect inflation. We estimate the monetary policy rules implied by a variety of alternative Phillips curves; our preferred model is based on a Phillips curve that is flat when output is close to equilibrium. We find that policy rates do not respond to inflation when the output gap is small, a situation that characterised most of the "Great Moderation" period.

Keywords: Monetary; policy; Phillips; curve; Non-linearity (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:32:y:2010:i:4:p:982-992

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