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The optimal neglect of inflation: an alternative interpretation of UK monetary policy during the “Great Moderation”


Reference:

Boinet, V. and Martin, C., 2010. The optimal neglect of inflation: an alternative interpretation of UK monetary policy during the “Great Moderation”. Journal of Macroeconomics, 32 (4), pp. 982-992.

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    Official URL:

    http://dx.doi.org/10.1016/j.jmacro.2010.06.005

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    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 nonlinear 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.

    Details

    Item Type Articles
    CreatorsBoinet, V.and Martin, C.
    DOI10.1016/j.jmacro.2010.06.005
    Related URLs
    URLURL Type
    http://www.scopus.com/inward/record.url?scp=77957926289&partnerID=8YFLogxKUNSPECIFIED
    Uncontrolled Keywordsnon-linearity,monetary policy,phillips curve
    DepartmentsFaculty of Humanities & Social Sciences > Economics
    Publisher StatementBoinet_Martin_Jnl_Macroecon_2010.pdf: ©Elsevier. This version is the accepted manuscript.
    RefereedYes
    StatusPublished
    ID Code19515

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