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

Reschreiter, Andreas (September 2006) Real and Nominal UK Interest Rates, ERM Membership and Inflation Targeting. IHS Economics Series 193

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Abstract or Table of Contents

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.;

Item Type: IHS Series
Keywords: 'ERM' 'Inflation targeting' 'Nominal and real rates' 'Term structure model' 'UK'
Classification Codes (e.g. JEL): E52, F33, G12
Status: Published
Date Deposited: 26 Sep 2014 10:38
Last Modified: 26 Jul 2017 08:39
URI: http://irihs.ihs.ac.at/id/eprint/1727

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