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

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  • Reschreiter, Andreas

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria)

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.

Suggested Citation

  • Reschreiter, Andreas, 2006. "Real and Nominal UK Interest Rates, ERM Membership and Inflation Targeting," Economics Series 193, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:193
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-193.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    ERM; Inflation targeting; Nominal and real rates; Term structure model; UK;

    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; Trading Volume; Bond Interest Rates

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