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Financial Stability and Monetary Policy

Christopher Martin () and Costas Milas ()

No 05/10, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: We argue that although UK monetary policy can be described using a Taylor rule in 1992- 2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.

Keywords: monetary policy; financial crisis (search for similar items in EconPapers)
Date: 2010-05
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