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Monetary policy rules in theory and in practice: evidence from the UK and the US

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  • Juan Paez-Farrell

Abstract

Given the large amount of interaction between research on monetary policy and its practice, this article examines whether some simple monetary policy rules that have been proposed in the academic literature, part of which has originated from within central banks, provide a reasonable characterization of actual policy in the United Kingdom and the United States. The article finds the simple rule that describes best the actual US monetary policy is a speed limit rule with dynamics, whilst for the UK it is a forward-looking rule. The simpler dynamics in the UK's monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting.

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  • Juan Paez-Farrell, 2009. "Monetary policy rules in theory and in practice: evidence from the UK and the US," Applied Economics, Taylor & Francis Journals, vol. 41(16), pages 2037-2046.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:16:p:2037-2046
    DOI: 10.1080/00036840701689496
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    Cited by:

    1. Juan Paez-Farrell, 2015. "Taylor rules, central bank preferences and inflation targeting," Working Papers 2015023, The University of Sheffield, Department of Economics.
    2. Perera, Roshan & Jayawickrema, Vishuddhi, 2014. "Monetary policy rules in practice: Evidence for Sri Lanka," MPRA Paper 95584, University Library of Munich, Germany.
    3. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
    4. Muneesh Kapur & Michael Debabrata Patra, 2010. "A Monetary Policy Model Without Money for India," IMF Working Papers 2010/183, International Monetary Fund.
    5. Kapur, Muneesh, 2018. "Macroeconomic Policies and Transmission Dynamics in India," MPRA Paper 88566, University Library of Munich, Germany.
    6. Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 2012/118, International Monetary Fund.
    7. Paez-Farrell, Juan, 2014. "Resuscitating the ad hoc loss function for monetary policy analysis," Economics Letters, Elsevier, vol. 123(3), pages 313-317.
    8. Brendon, Charles & Paustian, Matthias & Yates, Tony, 2013. "The pitfalls of speed-limit interest rate rules at the zero lower bound," Bank of England working papers 473, Bank of England.

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