Exploring historical economic relationships: two and a half centuries of British interest rates and inflation

In this paper, we use new data and modern time series econometrics to reassess the relationship between interest rates, prices and inflation in Britain across the two and a half centuries from 1750 to 2006 for which reliable data are available. We pay particular attention to monetary regimes that may lead to breaks in the relationship and to associated shifts in the stochastic structure of interest rates and prices. The behaviour of real interest rates is examined in detail and estimates of the expected real rate are calculated using a variety of methods to check for robustness.