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Real and nominal UK interest rates, ERM membership, and inflation targeting

  • Andreas Reschreiter

    ()

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://hdl.handle.net/10.1007/s00181-010-0345-z
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Article provided by Springer in its journal Empirical Economics.

Volume (Year): 40 (2011)
Issue (Month): 3 (May)
Pages: 559-579

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Handle: RePEc:spr:empeco:v:40:y:2011:i:3:p:559-579
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