Financial Stability and Monetary Policy

Reference:

Martin, C. and Milas, C., 2010. Financial Stability and Monetary Policy. Working Paper. Bath, UK: Department of Economics, University of Bath. (Bath Economics Research Working Papers; 05/10)

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Official URL:

http://www.bath.ac.uk/economics/research/workingpapers.html

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.

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