Financial crises and monetary policy: evidence from the UK

Christopher Martin; Costas Milas

doi:10.1016/j.jfs.2012.08.002

Financial crises and monetary policy: evidence from the UK

Christopher Martin
, Costas Milas

Department of Economics

University of Liverpool
Rimini Centre for Economic Analysis

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Abstract

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 language	English
Pages (from-to)	654-661
Journal	Journal of Financial Stability
Volume	9
Issue number	4
Early online date	5 Sept 2012
DOIs	https://doi.org/10.1016/j.jfs.2012.08.002
Publication status	Published - Dec 2013

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Author's accpeted version
OTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial Stability. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Stability, 2013, DOI 10.1016/j.jfs.2012.08.002
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Cite this

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AB - 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.

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Financial crises and monetary policy: evidence from the UK

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