Monetary Policy and Stagflation in the UK

Bank of England Working Paper No. 155

43 Pages Posted: 15 Oct 2002

See all articles by Edward Nelson

Edward Nelson

Federal Reserve Bank of St. Louis - Research Division; Board of Governors of the Federal Reserve System

Kalin Nikolov

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2002

Abstract

The volatile data for inflation, output, and interest rates in the United Kingdom prior to the 1990s, and the relative macroeconomic stability associated with inflation targeting, provide a rich basis for discriminating between rival explanations for the outbreak of stagflation. Alternative hypotheses are examined with the aid of a New Keynesian model of aggregate demand and inflation determination, estimated on quarterly UK data for 1959-2000. The model features IS and Phillips curves based on optimising behaviour, and fully incorporates the distinction between detrended output and the output gap stressed by optimising analysis. Using model simulations as well as information on the real-time views of policy-makers, alternative explanations are tested for the outbreak of inflation in the United Kingdom in the 1960s and 1970s. Inaccurate estimates of the degree of excess demand in the economy are found to have contributed significantly to the outbreak. But there is also evidence of a major role following from the failure at the time to recognise the importance of monetary policy, as opposed to non-monetary devices, in controlling inflation.

Suggested Citation

Nelson, Edward and Nikolov, Kalin, Monetary Policy and Stagflation in the UK (May 2002). Bank of England Working Paper No. 155. Available at SSRN: https://ssrn.com/abstract=315180 or http://dx.doi.org/10.2139/ssrn.315180

Edward Nelson (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8712 (Phone)
314-444-8731 (Fax)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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