UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement

53 Pages Posted: 29 Oct 2001

See all articles by Edward Nelson

Edward Nelson

Board of Governors of the Federal Reserve System

Kalin Nikolov

European Central Bank (ECB)

Date Written: October 2001

Abstract

Understanding the degree of measurement error in the estimates of the output gap available to policymakers in 'real time' is important both for the formulation of monetary policy and for the study of inflation behaviour. For the United Kingdom, no official output gap series was published for most of the period 1965-2000. An approximate series can, however, be deduced from analysis of statistical releases and policymakers' statements. On this basis, we construct a real-time UK output gap series for 1965-2000. We find that monetary policy errors due to output gap mismeasurement contributed approximately 3.0 to 7.1 percentage points to average UK inflation in the 1970s and 0.7-5.5 percentage points to inflation in the 1980s.

Note: Previously titled "A Real-Time Output Gap Series for the United Kingdom, 1965-2000: Construction, Analysis, and Implications for Inflation"

Keywords: Output gap, potential output, great inflation, Taylor rule, UK monetary policy, interest rate rules, real-time data, inflation targeting

JEL Classification: E52, E58

Suggested Citation

Nelson, Edward and Nikolov, Kalin, UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement (October 2001). Available at SSRN: https://ssrn.com/abstract=288360

Edward Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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