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.
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.
|Item Type ||Articles|
|Creators||Boinet, V.and Martin, C.|
|Uncontrolled Keywords||non-linearity, monetary policy, phillips curve|
|Departments||Faculty of Humanities & Social Sciences > Economics|
|Publisher Statement||Boinet_Martin_Jnl_Macroecon_2010.pdf: ©Elsevier. This version is the accepted manuscript.|
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