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Oxford Economic Papers Advance Access originally published online on April 24, 2006
Oxford Economic Papers 2006 58(4):706-721; doi:10.1093/oep/gpl009
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Right arrow E31 - Price Level; Inflation; Deflation
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© Oxford University Press 2006 All rights reserved

UK monetary policy under inflation forecast targeting: is behaviour consistent with symmetric preferences?

Naveen Srinivasan*,, Vidya Mahambare{dagger}, and M. Ramachandran{ddagger}

*Cardiff Business School, Cardiff University, Colum Drive, Cardiff CF10 3EU, UK
{dagger}Cardiff Business School, Cardiff University
{ddagger}Institute for Social and Economic Change, Bangalore, India

Correspondence: e-mail: SrinivasanNK{at}cardiff.ac.uk

This paper examines how the Bank of England conducts monetary policy in practice and assesses its policy preferences. Our empirical results using monthly ex post inflation forecast suggest that pursued policy can be characterized by a nonlinear policy reaction function with a deflation bias. We also find evidence of a target range as opposed to a point target for the 1992–5 period. These results are however, not robust to the use of the Bank's own forecast which suggests that pursued policy is consistent with a symmetric point target for inflation. In practice however, inflation has been consistently below the Bank's inflation target in recent years. We argue that a plausible explanation for this is that the MPC had systematically over predicted inflation, which in turn may have resulted in overly restrictive policy.

Key Words: JEL classifications: E52 • E58


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