Real and nominal UK interest rates,ERM membership,and inflation targeting |
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Authors: | Andreas Reschreiter |
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Institution: | (1) Department of Economic Systems and Institutions, University of L’Aquila, Piazza del Santuario, 19, 67040 Roio Poggio (AQ), Italy |
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Abstract: | This article estimates a two-factor term structure model to analyze the time-varying mean-reverting levels of the UK real
and nominal short-term interest rates. Before and during British membership in the ERM, the mean-reverting levels of real
and nominal short rates have a strong negative correlation. Afterward, when the UK implemented an inflation targeting policy,
the mean-reverting levels have a strong positive correlation. The article also reports empirical evidence of a link between
the time-varying central tendencies and inflation in the disinflation period before the implementation of the inflation targeting
policy. |
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Keywords: | |
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