Financial crises and monetary policy: evidence from the UK

Christopher Martin, Costas Milas

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We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a "financial crisis" regime in which policy rates respond strongly to financial stress and a "no-crisis" Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.
Original languageEnglish
Pages (from-to)654-661
JournalJournal of Financial Stability
Issue number4
Early online date5 Sept 2012
Publication statusPublished - Dec 2013


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