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UK monetary regimes and macroeconomic stylised facts

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Luca Benati

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Abstract

We exploit the marked changes in UK monetary arrangements since the metallic standards era to investigate continuity and changes across monetary regimes in key macroeconomic stylised facts in the United Kingdom. We find that, historically, inflation persistence has been the exception, rather than the rule, with inflation estimated to have been highly persistent only during the period between the floating of the pound, in June 1972, and the introduction of inflation targeting, in October 1992. As a corollary, our results clearly reject Mishkin's explanation for time variation in the extent of the Fisher effect, favouring instead Barsky's theory. We document a remarkable stability across regimes in the correlation between inflation and the rates of growth of both narrow and broad monetary aggregates at the very low frequencies, thus countering the Whiteman-McCallum criticism of Lucas. The post-1992 inflation-targeting regime appears to have been characterised, to date, by the most stable macroeconomic environment in recorded UK history, with the volatilities of the business-cycle components of real GDP, national accounts aggregates, and inflation measures having been, post-1992, systematically lower than for any of the pre-1992 monetary regimes/historical periods, often markedly so, as in the case of inflation and real GDP. The Phillips correlation between inflation and unemployment was flattest under the gold standard, steepest between 1972 and 1992. In line with Ball, Mankiw and Romer, evidence points towards a positive correlation between mean inflation and the steepness of the trade-off. We show how Keynes, in his dispute with Dunlop and Tarshis on real wage cyclicality, was entirely right: during the inter-war period, real wages were strikingly countercyclical. By contrast, under inflation targeting they have been, so far, strongly procyclical.

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Paper provided by Bank of England in its series Bank of England working papers with number 290.

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Julia Lendvai, 2006. "Inflation dynamics and regime shifts," Working Paper Series 684, European Central Bank. [Downloadable!]
  2. Paolo Surico, . "Monetary policy shifts and inflation dynamics," Bank of England working papers 338, Bank of England. [Downloadable!]
  3. Sujit Kapadia, 2005. "Optimal Monetary Policy under Hysteresis," Economics Series Working Papers 250, University of Oxford, Department of Economics. [Downloadable!]
  4. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, . "The danger of inflating expectations of macroeconomic stability: heuristic switching in an overlapping generations monetary model," Bank of England working papers 303, Bank of England. [Downloadable!]
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  5. Paolo Surico, 2005. "Monetary Policy Shifts, Indeterminacy and Inflation Dynamics," Macroeconomics 0504014, EconWPA. [Downloadable!]
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  6. Miles Parker, 2006. "Diverging Trends in Aggregate and Firm-Level Volatility in the UK," Discussion Papers 16, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
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