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

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Ehsan U. Choudhri

Carleton University - Department of Economics

Anna J. Schwartz

City University of New York (CUNY); National Bureau of Economic Research (NBER) - NY Office

Date Written: 1989

Abstract

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.

Suggested Citation

Bordo, Michael D. and Choudhri, Ehsan U. and Schwartz, Anna J., Money Stock Targeting, Base Drift and Price-Level Predictability: Lessons from the U.K. Experience (1989). NBER Working Paper No. w2825. Available at SSRN: https://ssrn.com/abstract=447235

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

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Ehsan U. Choudhri

Carleton University - Department of Economics ( email )

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Ottawa, Ontario
Canada

Anna J. Schwartz

City University of New York (CUNY) ( email )

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New York, NY 10010
United States

National Bureau of Economic Research (NBER) - NY Office

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New York, NY 10016-4309
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212-817-7957 (Phone)

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