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INDEPENDENCE DAY FOR THE ‘OLD LADY’: A NATURAL EXPERIMENT ON THE IMPLICATIONS OF CENTRAL BANK INDEPENDENCE *
Author(s) -
CHADHA JAGJIT S.,
MACMILLAN PETER,
NOLAN CHARLES
Publication year - 2007
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2007.01019.x
Subject(s) - independence (probability theory) , economics , inflation (cosmology) , monetary policy , sine qua non , monetary economics , government (linguistics) , price of stability , quantitative easing , inflation targeting , natural experiment , surprise , forward guidance , central bank , macroeconomics , political science , statistics , law , mathematics , credit channel , psychology , linguistics , physics , philosophy , theoretical physics , social psychology
Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was ‘news’ and illustrate that the reduction in medium‐ and long‐term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policy‐maker's aversion to inflation deviations from target. We therefore suggest that central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation.