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Modelling Monetary Policy: Inflation Targeting in Practice
Author(s) -
Martin Christopher,
Milas Costas
Publication year - 2004
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.0013-0427.2004.00366.x
Subject(s) - monetary policy , economics , inflation targeting , inflation (cosmology) , monetary economics , target range , macroeconomics , real interest rate , point (geometry) , keynesian economics , physics , geometry , mathematics , theoretical physics
This paper estimates a simple structural model of monetary policy in the UK focusing on the policy of inflation targeting introduced in 1992. We find that: (i) the adoption of inflation targeting led to significant changes in monetary policy; (ii) post‐1992 monetary policy is asymmetric as policy‐makers respond more to upward deviation of inflation away from the target; (iii) post‐1992 policy‐makers may be attempting to keep inflation within the 1.4%–2.6% range rather than pursuing a point target of 2.5% and (iv) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target.