Money Stock Targeting, Base Drift and Price-Level Predictability: Lessons from the U.K. Experience
37 Pages Posted: 19 Jun 2004 Last revised: 22 Sep 2010
Date Written: 1989
It is controversial whether money stock targeting without base drift (i.e. following a trend-stationary growth path) makes the price level more predictable in the presence of permanent shocks to money demand. Developing a procedure that does not run into the Lucas critique, and applying this procedure to the case of the U.K., the paper finds that the variance of the trend inflation rate in the U.K. would have been reduced by more than one half if the Bank of England had not allowed base drift.
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