Financial Stability And Monetary Policy

Date Added: Jun 2010
Format: PDF

The authors argue that although UK monetary policy can be described using a Taylor rule in 1992- 2007, this rule fails during the recent financial crisis. They interpret this as reflecting a change in policymakers' preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, they show this provides a superior empirical model over crisis and pre-crisis periods. They find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.