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UK inflation in the 1970s and 1980s: the role of output gap mismeasurement

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  • Edward Nelson
  • Kalin Nikolov

Abstract

Understanding the degree of measurement error in the estimates of the output gap available to policy-makers in 'real time' is important both for the formulation of monetary policy and for the study of inflation behaviour. For the United Kingdom, no official output gap series exists, but an approximate series can be deduced from analysis of statistical releases and policy-makers' statements. On this basis, a real-time UK output gap series is constructed, beginning in 1965, and it is therefore possible to obtain estimates of the extent of real-time output gap mismeasurement in the 1970s and 1980s. Monetary policy errors due to output gap mismeasurement are found to have contributed approximately 3.0 to 7.1 percentage points to average UK inflation in the 1970s and 0.7 to 5.5 percentage points to inflation in the 1980s.

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Paper provided by Bank of England in its series Bank of England working papers with number 148.

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Date of creation: Dec 2001
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Handle: RePEc:boe:boeewp:148

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