Working Paper: NBER ID: w2825
Authors: Michael D. Bordo; Ehsan U. Choudhri; Anna J. Schwartz
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.
Keywords: money stock targeting; base drift; price level predictability; UK experience
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| base drift (Y60) | price level uncertainty (D89) |
| no base drift (Y70) | price level uncertainty (D89) |
| base drift (Y60) | trend inflation rate variance (E31) |
| trend inflation rate variance (E31) | price level predictability (E30) |
| policy of no base drift (F52) | forecast variance of trend price level (E30) |