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Does the monetary policy committee still care about inflation? Some evidence from a small macroeconomic model

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This article derives an optimal Taylor rule for the UK economy using a simple estimated model based on data prior to the financial crisis of 2008. Optimal policy rules are calculated using simulation of the model over a long time period coupled with a search for optimal Taylor rule parameters using the Newton-Raphson loss minimization algorithm. The weights in the pre-crisis loss function are then inferred from the Taylor rule parameters estimated from the period corresponding to Bank of England independence, i.e. 1997–2008. These estimates are consistent with a low weight on inflation relative to output stabilization even before the crisis. The model is therefore consistent with the hypothesis that there has been no change in Bank of England preferences and that the Bank has responded to the crisis in a way which would have been predicted on the basis of its pre-crisis behaviour.
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Keywords: E43; E52; Taylor rule; interest rates; monetary policy; zero lower bound

Document Type: Research Article

Affiliations: School of Business and Economics, Loughborough University, Loughborough,LE11 3TU, UK

Publication date: 2013-07-01

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