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

Andreas Reschreiter

No 193, Economics Series from Institute for Advanced Studies

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.

Keywords: ERM; Inflation targeting; Nominal and real rates; Term structure model; UK (search for similar items in EconPapers)
JEL-codes: E52 F33 G12 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-fin, nep-mac and nep-mon
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https://irihs.ihs.ac.at/id/eprint/1727 First version, 2006 (application/pdf)

Related works:
Journal Article: Real and nominal UK interest rates, ERM membership, and inflation targeting (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ihs:ihsesp:193

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