The UK is likely to suffer greater volatility in inflation, output gap and yield curve after the recent crisis because of the type of rate targeted by its central bank.
New research published by BIS suggests repo rate targeters – such as the Bank of England with its bank rate – experience greater macroeconomic volatility in times of turmoil. In normal times, the difference is less obvious. Still, if a central bank adopts a policy of discretion over commitment*, repo rate targeters will suffer greater volatility even in normal times.
Central banks targeting market rates – such as the Fed and the SNB, which target the rate at which banks lend to each other – are therefore somewhat insulated from recent shocks. Researchers Read more