اهداف رسمی، استقلال بانک مرکزی و پویایی تورم در انگلستان : یک روش مارکوف سوئیچینگ

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.Central banks' projections – i.e. forecasts conditional on a given interest rate path – are often criticized on the grounds that their assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. The present paper describes three alternative approaches to constructing projections that are not subject to the above criticism, using the New Keynesian model as a reference framework. The three approaches are shown to generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.

Low inflation is a major policy goal for both developed and many developing countries. Sadly, in the post-World War II era, the inflation rate in the UK has at times been much higher than hoped for (see Benati, 2008a, for a detailed analysis of inflation in the UK over the “Great Inflation” and “Great Moderation” periods). Moderate inflation in and of itself may be neutral for long run income. However, inflation has been shown to increase inflation uncertainty (Friedman, 1977 and Ball, 1992), and uncertainty over inflation has been shown theoretically and empirically to lower investment and real output. Accordingly, the UK has tried a number of policies designed to lower inflation and its accompanying uncertainty. The Bank of England was given operational independence in 1997. Prior to this, there were several attempts to peg the exchange value of the pound, first by “shadowing” the deutschmark, and then by entering the Exchange Rate Mechanism (ERM) as a possible precursor to Euro adoption. Finally, after leaving the ERM in 1992, the Bank of England adopted a formal inflation target. Inflation targets have also since been adopted by most other industrialized nations. The purpose of this paper is to examine the UK inflation dynamics with the Markov Switching (MS) technique and, at the same time, to investigate the impacts of these various polices on UK inflation uncertainty. This differs from other papers that use regression or GARCH models to evaluate inflation mean/shock persistence/inflation uncertainty. The MS technique utilized here is based on an error correction model in which the mean, shock persistence and uncertainty in two different regimes can be evaluated. Thus, rather than examining changes in the mean, persistence and uncertainty of UK inflation separately or jointly (i.e., any two of the three), we investigate all three issues simultaneously. Furthermore, due to the special characteristics of the MS model, we are able to obtain the probability of the economy being in the high inflation uncertainty regime. Given the probability derived from the MS model, a probit model is incorporated to assess the impacts of UK’s various policies on inflation uncertainty. We find that the exchange rate pegs, e.g., shadowing the deutschmark and the ERM, were ineffective in decreasing uncertainty. In the case of the ERM, it actually increased uncertainty over the future path of prices. On the other hand, the 1981 budget lowered inflation uncertainty. Moreover, the adoption of the formal inflation target had a decidedly negative impact on inflation uncertainty. The inflation target did seem to foster clear communication and transparency, thus palpably decreasing the uncertainty over the future path of prices. While inflation rose above its 2% target, prompting a mandatory explanatory letter from the Bank of England’s governor Mervyn King to the Exchequer starting in April 2007, it is notable that in our sample, which runs through May of 2008, uncertainty did not pick up at the end. This indicates that, despite the breach of the target, the public, at least for a year, invested the Bank of England with much credibility. We investigate this issue further with a comparative exercise. While noting that the effect of inflation targeting in the UK may not be replicated in other countries, it is of interest to contrast the UK’s experience with that of the US, as the US is the largest industrialized country without a formal target, over the last several years of rising commodity prices and financial shocks. We find that over the 2005–2008 period, while uncertainty in the UK remained low, in the US, without a formal target, uncertainty rose. While one cannot be too bold in drawing clear causal inference from this comparison, it does bolster the case that in the UK inflation targeting did decrease the public’s uncertainty of the future path of prices in the face of economic and financial disturbances. This paper proceeds as follows. The next section describes the previous literature on inflation, uncertainty and policies designed to decrease both. The third section describes the MS methodology to be employed. The fourth section describes our results, while the fifth section discusses our results in light of previous findings. The sixth section concludes.

To repeat, it is of course the case that results for the UK may not have direct policy implications for other countries. Still, the finding that intermediate steps toward currency union were ineffective, if not actually harmful in countering inflation uncertainty is something that eastern European and other euro-zone aspirants should keep in mind as they embark on target zones and other “soft pegs” as first steps on the road to euro adoption. The strong effect of IT on uncertainty does bolster the case that IT provides a clear, observable target and, in the case of the UK, the Bank of England has been credible in its commitment to IT. The first 16 years of IT are of course no guarantee of future success. This may especially be the case since the Bank of England has missed the formal target and had to send explanatory letters to the Chancellor of the Exchequer starting in April of 2007. At the same time, our analysis indicates that, more than a year after Governor Mervyn King first admitted missing the target of 2%, uncertainty did not yet significantly rise in the UK, while the US with no target, has suffered from rising uncertainty over the path of future monetary policy and inflation.