Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast between the Standard GMM and Ex Ante Forecast Approaches

18 Pages Posted: 17 Aug 2013

See all articles by David Cobham

David Cobham

Heriot-Watt University - School of Management and Languages

Yue Kang

Heriot-Watt University; University of Stirling

Date Written: October 2013

Abstract

The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex ante approach are much closer to what is implied by the Bank's view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex ante approach.

JEL Classification: E43, E52

Suggested Citation

Cobham, David and Kang, Yue, Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast between the Standard GMM and Ex Ante Forecast Approaches (October 2013). Oxford Bulletin of Economics and Statistics, Vol. 75, Issue 5, pp. 662-679, 2013. Available at SSRN: https://ssrn.com/abstract=2311562 or http://dx.doi.org/10.1111/j.1468-0084.2012.00709.x

David Cobham (Contact Author)

Heriot-Watt University - School of Management and Languages ( email )

Edinburgh EH14 4AS, Scotland
United Kingdom
+44(0)131 451 3495 (Phone)
+44(0)131 451 3296 (Fax)

HOME PAGE: http://www.sml.hw.ac.uk/Staff_Profiles/DavidCobham.html

Yue Kang

Heriot-Watt University ( email )

Riccarton
Edinburgh, EH14 1AS
United Kingdom

University of Stirling ( email )

Stirling, Scotland FK9 4LA
United Kingdom

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