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

Bataa, Erdenebat and Wohar, Mark and Vivian, Andrew (2015): Changes in the relationship between short-term interest rate, inflation and growth: Evidence from the UK, 1820-2014.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Short-term Interest Rate, Inflation, Growth, VAR, Structural Breaks
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General

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