This paper estimates a simple structural model of monetary policy in the UK focusing on the policy of inflation targeting introduced in 1992. We find that: (i) the adoption of inflation targeting led to significant changes in monetary policy; (ii) post-1992 monetary policy is asymmetric as policy-makers respond more to upward deviation of inflation away from the target; (iii) post-1992 policy-makers may be attempting to keep inflation within the 1.4%-2.6% range rather than pursuing a point target of 2.5% and (iv) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target.

We assess the ability of the factors proposed in previous research to account for the stochastic evolution of the term structure of the U.S. and U.K. swap spreads. Using as factor proxies the level, volatility, and slope of the zerocoupon government yield curve as well as the Treasury-bill-London Interbank Offer Rate (LIBOR) spread and the corporate bond spread, we identify a procyclical behavior for the short-maturity U.S. swap spreads and a countercyclical behavior for longer maturity U.S. swap spreads. Liquidity and corporate bond spreads are also significant, but their importance varies with maturity. The liquidity premium is more important for short-maturityThe authors thank Robert Bliss, Abhay Abhyankar, Nicola Anderson, and an anonymous referee of this journal for their very useful comments and suggestions. Any remaining errors, however, are the authors' responsibility.

We thank Amar Radia, Ryan Banerjee and Christopher Bowdler for very useful comments and suggestions.

We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a "financial crisis" regime in which policy rates respond strongly to financial stress and a "no-crisis" Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.

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