Rules, Discretion and the United Kingdom's New Monetary Framework

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 November 1995

Working Paper No. 40
By Andrew G Haldane

This paper aims to juxtapose the theoretical and empirical literature on policy rules and targeting procedures alongside the United Kingdom's new monetary framework. For example, how does inflation targeting, as practised in the United Kingdom, compare with the optimal feedback rule for monetary policy? Or, conversely, how does it compare with Friedman's k% rule? Is an inflation target akin to an optimal central bank contract - an analogy drawn by Walsh (1995)? Or is it better characterised as giving rise to a (second-best) inflation-averse central bank - such as Rogoff's celebrated 'conservative' central banker?

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