ABSTRACT
In the case of MCIs the needs of policy ran ahead of the empirical work and it became necessary to employ a rounded estimate of the MCI ratio before the consequences of doing so had been fully tested. The alternative of not specifying a ratio and letting the market guess what the Bank might actually believe would have been more harmful both to credibility and to the usefulness of market signals. Values of monetary conditions above the MCI line do at least tell us that the market feels it more appropriate to hold conditions tighter than the Bank feels necessary to return inflation to the middle of the target range. The market is aware of the Bank’s caution and would not react adversely to new evidence suggesting that the MCI ratio should be changed.
