We are extremely grateful to Atanas Christev for discussion and advice on econometric and other issues, and to two anonymous referees for helpful comments.
Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches*
Version of Record online: 4 JUL 2012
© John Wiley & Sons Ltd and the Department of Economics, University of Oxford 2012
Oxford Bulletin of Economics and Statistics
Volume 75, Issue 5, pages 662–679, October 2013
How to Cite
Cobham, D. and Kang, Y. (2013), Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches. Oxford Bulletin of Economics and Statistics, 75: 662–679. doi: 10.1111/j.1468-0084.2012.00709.x
- Issue online: 16 AUG 2013
- Version of Record online: 4 JUL 2012
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.