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UK monetary regimes and macroeconomic stylised facts

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  • Luca Benati
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.

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  • Luca Benati, 2006. "UK monetary regimes and macroeconomic stylised facts," Bank of England working papers 290, Bank of England.
    • Handle: RePEc:boe:boeewp:290
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    Cited by:

    1. Luca Benati, 2008. "The "Great Moderation" in the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 121-147, February.
    2. Jason Lennard, 2020. "Uncertainty and the Great Slump," Economic History Review, Economic History Society, vol. 73(3), pages 844-867, August.
    3. Carlos Capistrán & Manuel Ramos‐Francia, 2009. "Inflation Dynamics In Latin America," Contemporary Economic Policy, Western Economic Association International, vol. 27(3), pages 349-362, July.
    4. Schrimpf, Andreas & Wang, Qingwei, 2010. "A reappraisal of the leading indicator properties of the yield curve under structural instability," International Journal of Forecasting, Elsevier, vol. 26(4), pages 836-857, October.
    5. Paolo Surico, 2007. "Monetary Policy Shifts and Inflation Dynamics," Palgrave Macmillan Books, in: David Cobham (ed.), The Travails of the Eurozone, chapter 3, pages 42-66, Palgrave Macmillan.
    6. Antonio Noriega & Carlos Capistrán & Manuel Ramos-Francia, 2013. "On the dynamics of inflation persistence around the world," Empirical Economics, Springer, vol. 44(3), pages 1243-1265, June.
    7. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1005-1060.
    8. Michael Woodford, 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 3-24, Fall.
    9. James Cloyne & Clodomiro Ferreira & Paolo Surico, 2020. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 87(1), pages 102-129.
    10. Benati, Luca & Goodhart, Charles, 2008. "Investigating time-variation in the marginal predictive power of the yield spread," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1236-1272, April.
    11. Miles Parker, 2006. "Diverging Trends in Aggregate and Firm-Level Volatility in the UK," Discussion Papers 16, Monetary Policy Committee Unit, Bank of England.
    12. Paolo Surico, 2005. "Monetary Policy Shifts, Indeterminacy and Inflation Dynamics," Macroeconomics 0504014, University Library of Munich, Germany.
    13. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2008. "The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 219-254, June.
    14. George Kapetanios & Tony Yates, 2014. "Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change," Empirical Economics, Springer, vol. 47(1), pages 305-345, August.
    15. Lendvai, Julia, 2006. "Inflation dynamics and regime shifts," Working Paper Series 684, European Central Bank.
    16. Saumitra, Bhaduri & Raja, Sethudurai, 2012. "A note on excess money growth and inflation dynamics: evidence from threshold regression," MPRA Paper 38036, University Library of Munich, Germany.
    17. Barbara Roffia & Andrea Zaghini, 2007. "Excess Money Growth and Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 241-280, December.
    18. Liu, Philip & Mumtaz, Haroon & Theophilopoulou, Angeliki, 2014. "The transmission of international shocks to the UK. Estimates based on a time-varying factor augmented VAR," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 1-15.
    19. Harrison, Richard & Oomen, Özlem, 2010. "Evaluating and estimating a DSGE model for the United Kingdom," Bank of England working papers 380, Bank of England.
    20. Alistair Macaulay, 2022. "Heterogeneous Information, Subjective Model Beliefs, and the Time-Varying Transmission of Shocks," CESifo Working Paper Series 9733, CESifo.
    21. David C. Wheelock & Mark E. Wohar, 2009. "Can the term spread predict output growth and recessions? a survey of the literature," Review, Federal Reserve Bank of St. Louis, vol. 91(Sep), pages 419-440.
    22. Sujit Kapadia, 2005. "Optimal Monetary Policy under Hysteresis," Economics Series Working Papers 250, University of Oxford, Department of Economics.

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    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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