Central Bank Goals, Institutional Change and Monetary Policy: Evidence from the US and UK +

Abstract

The theoretical literature on monetary policy design places great emphasis on the influence exercised by institutional reforms on the conduct of monetary policy. There is little empirical evidence on this point, and on the impact which changes in interest rate policy have on the transmission mechanism through the Lucas critique. This paper uses superexogeneity/invariance tests and time-varying VAR models to examine how the transmission mechanism and policy reactions have varied in the UK over the last decade. As a benchmark, we also estimate these models for the US, a country in which the formal institutional framework has not changed markedly over recent years. Our results show that institutional change has affected UK interest rate setting, and that this in turn has affected the transmission mechanism. Interestingly our estimates for the US also detect changes in monetary policy reactions to macroeconomic conditions.

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