Changes in the relationship between short-term interest rate, inflation and growth: Evidence from the UK, 1820-2014

Erdenebat Bataa, Mark Wohar and Andrew Vivian

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the dynamic relationship between interest rates, inflation and economic growth using the longest available dataset for the UK and a vector autoregression (VAR). The approach adopted enables structural breaks to be identified in the dynamic system. It then can ascribe breaks in covariance to changes in volatility or to changes in correlation. Our empirical findings indicate several structural breaks in the relationship, which lead to very different inference compared to a constant parameter model. For example, interest rates respond much more strongly to growth or inflation over recent decades. Furthermore, our evidence suggests that all variables become more persistent after the classical gold standard ended with the onset of WW1.

Keywords: Short-term Interest Rate; Inflation; Growth; VAR; Structural Breaks (search for similar items in EconPapers)
JEL-codes: C12 C32 E20 (search for similar items in EconPapers)
Date: 2015-09-01
New Economics Papers: this item is included in nep-ger and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Changes in the relationship between short‐term interest rate, inflation and growth: evidence from the UK, 1820–2014 (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:72422

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