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Changes in the relationship between short‐term interest rate, inflation and growth: evidence from the UK, 1820–2014
Author(s) -
Bataa Erdenebat,
Vivian Andrew,
Wohar Mark
Publication year - 2019
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/boer.12199
Subject(s) - economics , variance decomposition of forecast errors , vector autoregression , inflation (cosmology) , interest rate , variance (accounting) , econometrics , monetary policy , structural vector autoregression , term (time) , macroeconomics , real interest rate , dynamic factor , monetary economics , physics , accounting , quantum mechanics , theoretical physics
This paper examines the dynamic relationship between interest rates, inflation and economic growth using a long dataset for the UK. The approach adopted enables us to identify structural breaks in the dynamic system (vector autoregression (VAR)). We find interest rates respond much more strongly to growth and inflation over recent decades, and forecast error variance decomposition analysis indicates there is increasing interconnectedness between the variables in recent years. Economic policymakers need to carefully monitor the linkages between these variables and be prepared to adjust their monetary policy tools when faced with structural changes.