UK Monetary Regimes and Macroeconomic Stylised Facts

67 Pages Posted: 5 Apr 2006

See all articles by Luca Benati

Luca Benati

Bank of England - Monetary Analysis

Date Written: March 2006

Abstract

We exploit the marked changes in UK monetary arrangements since the metallic standards era to investigate continuity and changes across monetary regimes in key macroeconomic stylised facts in the United Kingdom. We find that, historically, inflation persistence has been the exception, rather than the rule, with inflation estimated to have been highly persistent only during the period between the floating of the pound, in June 1972, and the introduction of inflation targeting, in October 1992. As a corollary, our results clearly reject Mishkin's explanation for time variation in the extent of the Fisher effect, favouring instead Barsky's theory. We document a remarkable stability across regimes in the correlation between inflation and the rates of growth of both narrow and broad monetary aggregates at the very low frequencies, thus countering the Whiteman-McCallum criticism of Lucas. The post-1992 inflation-targeting regime appears to have been characterised, to date, by the most stable macroeconomic environment in recorded UK history, with the volatilities of the business-cycle components of real GDP, national accounts aggregates, and inflation measures having been, post-1992, systematically lower than for any of the pre-1992 monetary regimes/historical periods, often markedly so, as in the case of inflation and real GDP. The Phillips correlation between inflation and unemployment was flattest under the gold standard, steepest between 1972 and 1992. In line with Ball, Mankiw and Romer, evidence points towards a positive correlation between mean inflation and the steepness of the trade-off. We show how Keynes, in his dispute with Dunlop and Tarshis on real wage cyclicality, was entirely right: during the inter-war period, real wages were strikingly countercyclical. By contrast, under inflation targeting they have been, so far, strongly procyclical.

Keywords: Inflation, monetary policy, Lucas critique, frequency domain

JEL Classification: E30, E32

Suggested Citation

Benati, Luca, UK Monetary Regimes and Macroeconomic Stylised Facts (March 2006). Bank of England Working Paper No. 290, Available at SSRN: https://ssrn.com/abstract=894880 or http://dx.doi.org/10.2139/ssrn.894880

Luca Benati (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
+020 7601 3573 (Phone)

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