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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

    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
    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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