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Real and Nominal UK Interest Rates, ERM Membership and Inflation Targeting

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Author Info
Reschreiter, Andreas (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

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Abstract

This paper models the time-varying mean of the UK real and nominal short-term interest rate. Both rates mean revert to a time-varying central tendency in continuous-time interest rate models. Before and during British membership in the ERM, the mean of the real and nominal short rate have a strong negative correlation. Afterwards, when the UK implemented an inflation targeting policy, the mean of the real and nominal short rate are no longer negatively correlated, but instead have a strong positive correlation. The paper also reports empirical evidence of a relationship between the mean of the real and nominal short rate and inflation in the period before the departure from the ERM.

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File URL: http://www.ihs.ac.at/publications/eco/es-193.pdf
File Format: application/pdf
File Function: First version, 2006
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Publisher Info
Paper provided by Institute for Advanced Studies in its series Economics Series with number 193.

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Length: 22 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:ihs:ihsesp:193

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Related research
Keywords: ERM; Inflation targeting; Nominal and real rates; Term structure model; UK;

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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This page was last updated on 2009-11-27.

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