Bank of Lithuania

U.K. monetary policy under inflation targeting


This paper considers a variety of reaction functions in the context of real time data to analyse U.K. monetary policy under inflation targeting adopted in 1992. In order to deal with lack of current and future data in real time, we construct the forecasts of expected variables in the first step and use the constructed data for the estimations of contemporaneous- and forward-looking rules. Moreover, we employ the impulse-indicator saturation method to deal with the issue of outliers and therefore obtain robust estimates of policy parameters. Our results show that the robust characteristics of monetary policy during the inflation targeting regime are forward-looking and raising the interest rate by more than one-to-one to movements in inflation, thereby satisfying the Taylor principle.

JEL Codes: C22, C52, C53, E52, E58.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

Real-time data, Taylor rule, Forecasting, Impulse indicator saturation, Autometrics.