The policy instrument of central banks everywhere has usually been a short-term nominal interest rate. This means that central banks have adopted operating procedures whose goal has been to produce some desired level of money market interest rates. Although the Bank of England was in many respects the pioneer of these operating procedures, theoretical and empirical attention has focused almost exclusively on the Federal Reserve. This thesis aims to redress this imbalance by examining - in detail - the sterling money market and the operations of the Bank of England. This task is carried out in two parts. Part I reviews central banks' use of the interest instrument more generally, beginning with an historical sketch of the evolution of central bank money market operations. This sketch is complemented by a critical discussion of two important concepts relating to such operations, namely interest rate smoothing and money base control. A simple analytical model is then developed to illustrate the determination of money market interest rates by the central bank. Part II specifically concerns the money market operations of the Bank of England, and their implications for the behaviour of sterling money market interest rates. First, a model of the term structure of money market interest rates is derived. Its predicted behaviour in reaction to a change in the Bank's official rate is then empirically verified. Next, the yield on eligible bills - the Bank's intervention asset - is examined. It is argued that these assets carry an excess liquidity premium, arising from the Bank's constraints on their issue. Finally, an empirical model of the overnight interest rate - the UK equivalent of the federal funds rate - is developed, and the reasons for its volatility are investigated.

In Korea, an inflation targeting (IT) regime was adopted in the aftermath of the Korean currency crisis of 1997–1998. At that time, the Bank of Korea (BOK) shifted the instrument of monetary policy from monetary aggregates to interest rates. Recently, central bank policymakers have confronted more uncertainties than ever before when deciding their policy interest rates. In this monetary policy environment, it is worth exploring whether the BOK has kept a conservative posture in moving the Korean call rate target, the equivalent of the US Federal Funds rate target since the implementation of an interest rate-oriented monetary policy. Together with this, the global financial crisis (GFC) of 2007–2009 provoked by the US sub-prime mortgage market recalls the following question: should central banks pre-emptively react to a sharp increase in asset prices? Historical episodes indicate that boom-bust cycles in asset prices, in particular, house prices, can be damaging to the economy. In Korea, house prices have been evolving under uncertainties, and in the process house-price bubbles have been formed. Therefore, in recent years, central bankers and academia in Korea have paid great attention to fluctuations in asset prices. In this context, the aims of this thesis are: (i) to set up theoretical and empirical models of monetary policy under uncertainty; (ii) to examine the effect of uncertainty on the operation of monetary policy since the adoption of interest rate-oriented policy; and (iii) to investigate whether gradual adjustment in policy rates can be explained by uncertainty in Korea. Another important aim is (iv) to examine whether house-price fluctuations be taken into account in formulating monetary policy. The main findings of this thesis are summarised as follows. Firstly, as in advanced countries, the four stylised facts regarding the policy interest rate path are found in Korea: infrequent changes in policy rates; successive changes in the same direction; asymmetric adjustments in terms of the size of interest-rate changes for continuation and reversal periods; and a long pause before reversals in policy rates. These patterns of policy rates (i.e., interest-rate smoothing) characterised the central bank‘s reaction to inflation and the output gap as being less aggressive than the optimising central bank behavior would predict (Chapter 3). Secondly, uncertainty may provide a rationale for a smoother path of the policy interest rate in Korea. In particular, since the introduction of the interest rate-oriented monetary policy, the actual call money rates have shown to be similar to the optimal rate path under parameter uncertainty. Gradual movements in the policy rates do not necessarily indicate that the central bank has an interest-rate smoothing incentive. Uncertainty about the dynamic structure of the economy, which is dubbed ‗parameter uncertainty‘, could account for a considerable portion of the observed gradual movements in policy interest rates (Chapter 4). Thirdly, it is found that the greater the output-gap uncertainty, the smaller the output-gap response coefficients in the optimal policy rules, and in a similar vein, the greater inflation uncertainty, the smaller the inflation response coefficients. The optimal policy rules derived by using data without errors showed the large size of the output-gap and inflation response coefficients. This finding confirms that data uncertainty can be one of sources explaining the reasons why monetary policymakers react less aggressively in setting their interest rate instrument (Chapter 5). Finally, we found that house prices conveyed some useful information on conditions such as possible financial instability and future inflation in Korea, and the house-price shock differed from other shocks to the macroeconomy in that it had persistent impacts on the economy, consequently provoking much larger economic volatility. Empirical simulations showed that the central bank could reduce its loss values in terms of economic volatility, resulting in promoting overall economic stability when it responds more directly to fluctuations in house prices. This finding provides the reason why the central bank should give more attention to house-price fluctuations when conducting monetary policy (Chapter 6).

This thesis contains four chapters, each of which examines different aspects of the uncertainty facing monetary policymakers.''Monetary policy and market interest rates'' investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities. The reaction of market rates is shown to depend crucially on market participants' interpretation of the factors underlying the policy move. These theoretical predictions find support in an empirical analysis of the U.S. financial markets.''Predicting monetary policy using federal funds futures prices'' examines how prices of federal funds futures contracts can be used to predict policy moves by the Federal Reserve. Although the futures prices exhibit systematic variation across trading days and calendar months, they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the Federal Open Market Committee from 1994 to 1998.''Monetary policy with uncertain parameters'' examines the effects  of parameter uncertainty on the optimal monetary policy strategy. Under certain parameter configurations, increasing uncertainty is shown to lead to more aggressive policy, in contrast to the accepted wisdom.''Should central banks be more aggressive?'' examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality. These counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior. An unrestricted model, taking the dynamics of the economy and multiplicative parameter uncertainty into account, leads to optimal policy prescriptions which are very close to observed Federal Reserve behavior. / <p>Diss. Stockholm : Handelshögskolan, 1999</p>

John B. Taylor, professor i nationalekonomi vid Stanford University, presenterade år 1993 en penningpolitisk regel som syftade till att vara ett hjälpmedel för centralbanker vid räntebeslut. Taylor-regeln är mycket enkel i sitt uförande och baseras på att styrräntan bör sättas efter två variabler: BNP-gapet och inflationsavvikelsen. Denna styrränteregel fick genomslag inom den vetenskapliga världen men spreds även till makroekonomisk praktik och medförde stora förändringar för penningpolitiken. Flera empriska studier har publicerats sedan Taylor-regeln tillkom och det råder det delade meningar om hur väl Taylor-regeln presterar för olika typer av ekonomier och hur användbar den är idag. Det har även uppkomit nya teorier angående trögheten i effekterna av styrränteförändringar och vid vilken tidpunkt dessa får en inverkan på inflationstakten. Syftet med denna uppsats är att jämföra hur väl den ursprungliga Taylor-modellen och en tidslaggad modell förklarar centralbankernas historiska styrräntesättning i fem länder med inflationsmål under tidsperioden 2000-2013. Analysen av resultaten görs med utgångspunkt i ländernas olika ekonomiska egenskaper samt tidsperioden som studien omfattar. Studien begränsas till jämförelser av de två Taylor-modellernas tillämpbarhet vid styrräntesättningar för länderna Brasilien, Kanada, Polen, Sverige och Sydafrika. De två modellerna modifieras också med en styrränteutjämningsfunktion.   Våra resultat tyder på att den ursprungliga Taylor-regeln presterar bättre i förhållande till den tidslaggade modellen när det gäller att förklara den faktiska styrräntesättningen idag för alla länder i studien utom Polen. Den tidslaggade presterar dock bättre än den ursprungliga för de utvecklade ekonomierna Sverige och Kanada under 1990-talet. Båda modellerna gör kraftiga över- och underskattningar som till stor del avhjälps med den utjämningsfunktion som vi tillämpar. Koefficienterna hålls konstanta över hela tidsperioden, vilket inte är rimligt då en viss dynamik bör inkluderas så att regeln justeras efter varje period då för mycket vikt läggs vid BNP-variabeln som såldes är en bidragande faktor till regelns över- och underskattningar. Regeln presterar bättre för ekonomier med stabila förhållanden mellan tillväxttakt och inflationstakt än för länder som lider av mer volatila förhållanden mellan dessa två variabler, likt tillväxtländerna i vår studie. Dessutom ger Taylor-regeln skattningar som ligger närmre den faktiska styrräntesättningen under de tidigare delarna av perioden för att sedan till större del börja avvika från den faktiskt satta styrräntan.   Slutsatserna som kan dras utifrån våra resultat är att den ursprungliga Taylor-regeln presterar bäst i att beskriva ett lands styrräntesättning sett till kvantitativa mått medan en tidslaggad modell tar större hänsyn faktiska förhållanden. Över lag presterar modellerna bättre för de utvecklade ekonomierna än för tillväxtekonomierna och huruvida storleken på ekonomin har någon inverkan är svårt att avgöra. Resultaten tyder också på att Taylor-regeln med tidslagg ligger närmre den faktiska styrräntesättningen för de utvecklade ekonomierna under 1990-talet än under perioden 2000-2013 medan den ursprungliga presterar bättre idag. / John. B Taylor, professor of Economics at Stanford University, presented a monetary policy rule in 1993 which intended to help central banks with their interst rate decisions. In its design the Taylor-rule was very simple and based on only two variables: the GDP-gap and the deviation of actual inflation from the inflation target. The Taylor rule had a great impact on the academic research and also contributed to changes within monetary policy around the world. Many empirical studies have been published on the Taylor rule and there are divided contentions about its applicability in different kind of economies and its relevance today. New theories have also been published regardning the time aspect of the impact on inflation due to a change in the interest rate. The intentions of this study is to make a comparsion between the original Taylor rule and a Taylor rule including a time lag regarding how well they describe the actual interest rates set by the central banks in five countries during the period 2000-2013. The results will be analyzed under consideration of the different economies attributes. The study compares the two kinds of Taylor rules and the applicability in describing the historical interest rate in Brazil, Canada, Poland, Sweden and South Africa. The two rules have also been modified with an interest rate smoothing-function.   Our results conclude that the original Taylor rule describes the historical interest rate better than the rule including a time lag for the time period 2000-2013 for all countries apart from Poland. For the developed economies Canada and Sweden the time lagged model show less deviations for the 1990’s. However both rules tend to over and underestimate the valutation of the interest rate. The smoothing function does to some extent correct this problem. The coefficients of the variables are held constant during the study which in reality should not be the case. They should instead be adjusted between every period to make allowances for the different relationship of the two variables. Mostly too much weight is put on the GDP-variable which should be a contributing cause of the overestimations. The rules do however have the tendency to describe the historical interst rate of the developed economies superior to the developing economies. The performance is greater at the beginning of the period with less deviation from the actual outcome than later on. The conclusion of our study is that the original Taylor rule generally performs superior to the one including time lag with conciderations to the deviations from the actual interest rates. However, the Taylor rule including the time-lag does allow for actual circumstances which the original Taylor rule does not take into consideration. Mainly the rules do perform better for developed economies compared to developing economies. Regarding the impact of the size of the economy on the applicability of the rules it was difficult to conclude anything specific. The Taylor rule with the time-lag is more applicable for the developed economies during the earlier time period, the 1990’s, than the later time period, the 2000’s where the original Taylor rule shows less deviations.