21 Taylor, J (1993), “Discretion versus policy rules in practice”, Carnegie Rochester Series on Public Policy, 39. 11  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  11  First, any lambda that can be estimated from simple scatter plots is actually an amalgam of several elements. Most fundamental is the policy remit itself, which frames the ‘true’, underlying preferences that the monetary authority must pursue, as I discussed earlier. As important, however, is that the actual trade-off struck will be influenced by individual MPC members’ views of both the nature of the shocks hitting the economy and the transmission mechanism of monetary policy – in other words, why the economy is behaving as it is, and how interest rates affect output and inflation. Put another way, if members have, for example, different views of kappa – the slope of the Phillips curve – their lambdas will appear to be different. Indeed, it is quite possible for the Phillips curve slope to vary over time, and some have argued that it may have flattened in recent years. 22  A close reading of the MPC’s minutes since its inception reveals the vast majority of differences of opinion regarding the path for monetary policy have originated in this second set of factors (the nature of the shocks, the structure of the economy and the monetary policy transmission mechanism). Disagreements about the desired path for policy have arisen because of different views of how the economy is acting.
For the post-crisis period alone, when the monetary policy trade-off was particularly stark, lambda is estimated to be around one-quarter, also on the basis of both outturns and forecasts. 18  In other words, the MPC tolerated a period of above-target inflation in order to  support the real economy. When combined with an average Phillips Curve slope, this implies deviations of the output gap from zero that are around half the size of those of inflation from the target. Chart 6: Data outturns are consistent with a value of lambda of between 0.1 and 0.2 for the inflation-targeting era as a whole, and around ¼ for the post-crisis period… Great moderation  Chart 7: … with similar values implied by MPC forecasts since independence  Inflation deviation from target (pp) 1.0  Inflation (%)  6  Financial crisis and after  Great moderation Financial crisis and after  0.5 4 0.0 -1 2 -6 -4 Output gap (%)  -2  0  2  -0.5  0  0.5  1  -0.5  1.5 2 Cumulative growth, relative to trend (%)  -1.0 0 -1.5  -2 Source: Bank calculations. -2.0 Notes: Chart shows inflation deviation from target at the 2-year forecast horizon against cumulative growth, relative to trend, as a proxy for the output gap. 16  Typically, these demand disturbances were well signalled by survey measures of activity, resulting in a high correlation of these and Bank Rate Ref Broadbent.