Low Inflation vs. Stable Inflation: Evidence from the UK, 1688–2009

Georgios Karras

Scottish Journal of Political Economy, 2015, vol. 62, issue 5, 505-517

Abstract: type="main" xml:id="sjpe12090-abs-0001">

This paper investigates the relationship between inflation and inflation volatility. Using annual data from 1688 to 2009, the results show that UK inflation and its volatility have been positively correlated when inflation exceeds a certain value, but negatively correlated when inflation is below this threshold. The evidence also suggests that the break in the relationship occurs between annual inflation rates of 0.6% and 5.5%, which includes both the 2% inflation target of many central banks, and the 3.5% break point predicted by the New Keynesian model of Coibion et al. (2012).

Date: 2015
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