Monetary policy

Andrew Powell, 25 November 2017

The recent interest rate rise in the UK occurred despite negative economic news. This is not what conventional inflation-targeting policy would imply. This column argues that recent Latin American experience suggests the theory underlying inflation targeting may need to be reconsidered. Specifically, for small open economies, the role of the exchange rate and inflation expectations should be considered when deciding how to react. 

Elisabeth Falck, Mathias Hoffmann, Patrick Hürtgen, 06 November 2017

Existing theoretical and empirical evidence suggests that less expansionary monetary policies lead to lower inflation and dampened inflation expectations. This column considers how the dispersion of inflation expectations can affect this relationship. The results show that an increase in the policy rate can give rise to higher inflation in the short run if professional inflation forecasts differ widely. These findings highlight the importance of considering the amount of agreement about inflation expectations in monetary policy decision-making.

Ricardo Reis, David Miles, 01 November 2017

David Miles and Ricardo Reis discuss the 19th Geneva Report on the World Economy, which asks why inflation has remained in such a narrow range over the last decade. 

David Miles, Ugo Panizza, Ricardo Reis, Ángel Ubide, 25 October 2017

Occasionally, inflation is stubborn. For many years it was hard to bring under control, but in the last decade has been low and stable. The latest Geneva Report on the World Economy studies the latest bout of stubbornness, asking why inflation has remained in such a narrow range. It shows that a large number of diverse shocks have hit developed economies during the last decade, which have more or less cancelled each other out. One of these 'shocks' has been monetary policy, which was skilfully used in response to wider macroeconomic events. Central banks, in other words, combined good policies and good luck. Next time, however, we may not be so lucky.

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, 24 October 2017

Price stability is an explicit target for the ECB, but the definition of the 2% target is less clear in its monetary policy stance over time. This column presents two alternative interpretations of the ECB’s definition of price stability. First, the ECB dislikes inflation rates above 2% more than rates below 2%. Second, the ECB’s policy responses to past inflation gaps are symmetric around a target of 1.6% to 1.7%. Out-of-sample predictions of the reaction function based on the second interpretation track well an estimated shadow interest rate during the zero lower bound period.

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