IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/2999.html
   My bibliography  Save this paper

UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement

Author

Listed:
  • Nelson, Edward
  • Nikolov, Kalin

Abstract

Understanding the degree of measurement error in the estimates of the output gap available to policymakers 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 was published for most of the period 1965–2000. An approximate series can, however, be deduced from analysis of statistical releases and policymakers’ statements. On this basis, we construct a real-time UK output gap series for 1965–2000. We find that monetary policy errors due to output gap mismeasurement contributed approximately 3.0 to 7.1 percentage points to average UK inflation in the 1970s and 0.7–5.5 percentage points to inflation in the 1980s.

Suggested Citation

  • Nelson, Edward & Nikolov, Kalin, 2001. "UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement," CEPR Discussion Papers 2999, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2999
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2999
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 583-601, June.
    2. William Poole, 1999. "Monetary policy rules?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 3-12.
    3. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126, National Bureau of Economic Research, Inc.
    4. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
    5. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    6. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14, National Bureau of Economic Research, Inc.
    7. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
    8. Bennett T. McCallum, 2000. "Alternative monetary policy rules : a comparison with historical settings for the United States, the United Kingdom, and Japan," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 49-79.
    9. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    10. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
    11. Bennett T. McCallum & Edward Nelson, 1999. "Performance of Operational Policy Rules in an Estimated Semiclassical Structural Model," NBER Chapters, in: Monetary Policy Rules, pages 15-56, National Bureau of Economic Research, Inc.
    12. P J Forsyth & J A Kay, 1980. "The economic implications of North Sea Oil Revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 1(3), pages 1-28, July.
    13. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    14. Charles Bean & James Symons, 1989. "Ten Years of Mrs. T," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 13-72, National Bureau of Economic Research, Inc.
    15. Hendry, David F, 1994. "HUS Revisited," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 86-106, Summer.
    16. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    17. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    18. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    19. Thomas Sargent & Noah Williams & Tao Zha, 2009. "The Conquest of South American Inflation," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 211-256, April.
    20. Woodford Michael, 2002. "Inflation Stabilization and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-53, February.
    21. Svensson, Lars E. O. & Woodford, Michael, 2003. "Indicator variables for optimal policy," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 691-720, April.
    22. Charles Bean, 2000. "The Australian Economic 'Miracle': A View from the North," RBA Annual Conference Volume (Discontinued), in: David Gruen & Sona Shrestha (ed.),The Australian Economy in the 1990s, Reserve Bank of Australia.
    23. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(2), pages 239-262, April.
    24. Egginton, Don M. & Pick, Andreas & Vahey, Shaun P., 2002. "'Keep it real!': a real-time UK macro data set," Economics Letters, Elsevier, vol. 77(1), pages 15-20, September.
    25. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    26. Faust, Jon & Rogers, John H & Wright, Jonathan H, 2005. "News and Noise in G-7 GDP Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 403-419, June.
    27. Kevin J. Lansing, 2000. "Learning about a shift in trend output: implications for monetary policy and inflation," Proceedings, Federal Reserve Bank of San Francisco.
    28. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-819, December.
    29. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    30. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
    31. Michael Woodford, 1999. "Commentary : how should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 277-316.
    32. Orphanides, Athanasios & Porter, Richard D. & Reifschneider, David & Tetlow, Robert & Finan, Frederico, 2000. "Errors in the measurement of the output gap and the design of monetary policy," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 117-141.
    33. Ehrmann, Michael & Smets, Frank, 2003. "Uncertain potential output: implications for monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1611-1638, July.
    34. Clements, Michael P & Hendry, David F, 1995. "Macro-economic Forecasting and Modelling," Economic Journal, Royal Economic Society, vol. 105(431), pages 1001-1013, July.
    35. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-984, November.
    36. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, March.
    37. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    38. K. Alec Chrystal, 1984. "Dutch disease or monetarist medicine?: The British economy under Mrs. Thatcher," Review, Federal Reserve Bank of St. Louis, vol. 66(May), pages 27-37.
    39. Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    40. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    41. Perez, Stephen J., 2001. "Looking back at forward-looking monetary policy," Journal of Economics and Business, Elsevier, vol. 53(5), pages 509-521.
    42. Nicholas Oulton, 1987. "Plant Closures and the Productivity 'Miracle' in Manufacturing," National Institute Economic Review, National Institute of Economic and Social Research, vol. 121(1), pages 53-59, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    2. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
    3. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    4. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
    5. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
    6. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    7. Lansing, Kevin J. & Trehan, Bharat, 2003. "Forward-looking behavior and optimal discretionary monetary policy," Economics Letters, Elsevier, vol. 81(2), pages 249-256, November.
    8. repec:zbw:cfswop:wp200424 is not listed on IDEAS
    9. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
    10. Athanasios Orphanides, 2000. "Activist stabilization policy and inflation: the Taylor rule in the 1970s," Finance and Economics Discussion Series 2000-13, Board of Governors of the Federal Reserve System (U.S.).
    11. Robert R Tchaidze, 2001. "Estimating Taylor Rules in a Real Time Setting," Economics Working Paper Archive 457, The Johns Hopkins University,Department of Economics.
    12. Gerberding, Christina & Worms, Andreas & Seitz, Franz, 2004. "How the Bundesbank really conducted monetary policy: An analysis based on real-time data," Discussion Paper Series 1: Economic Studies 2004,25, Deutsche Bundesbank.
    13. Frederick H. Wallace & Gary L. Shelley & Luis F. Cabrera Castellanos, 2004. "Pruebas de la neutralidad monetaria a largo plazo: el caso de Nicaragua," Monetaria, Centro de Estudios Monetarios Latinoamericanos, CEMLA, vol. 0(4), pages 407-418, octubre-d.
    14. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    15. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1105-1129, September.
    16. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
    17. Annicchiarico, Barbara & Giammarioli, Nicola & Piergallini, Alessandro, 2012. "Budgetary policies in a DSGE model with finite horizons," Research in Economics, Elsevier, vol. 66(2), pages 111-130.
    18. Y. Adema, 2003. "A taylor rule for the euro area based on quasi-real time data," WO Research Memoranda (discontinued) 738, Netherlands Central Bank, Research Department.
    19. Carl E. Walsh, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-348.
    20. Orphanides, Athanasios & Williams, John C., 2007. "Robust monetary policy with imperfect knowledge," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1406-1435, July.
    21. Givens, Gregory E. & Salemi, Michael K., 2015. "Inferring monetary policy objectives with a partially observed state," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 190-208.

    More about this item

    Keywords

    great inflation; inflation targeting; interest rate rules; output gap; potential output; real-time data; Taylor rule; UK monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:2999. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: https://www.cepr.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.