Changes in the Relationship between Short‐Term Interest Rate, Inflation and Growth: Evidence from the UK, 1820–2014

25 Pages Posted: 5 May 2020

See all articles by Erdenebat Bataa

Erdenebat Bataa

National University of Mongolia - Department of Economics

Andrew Vivian

Loughborough University

Mark E. Wohar

University of Nebraska at Omaha

Date Written: October 2019

Abstract

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.

Keywords: inflation, growth, short term interest rate, structural breaks, VAR

JEL Classification: C12, C32, E20, G12, G15

Suggested Citation

Bataa, Erdenebat and Vivian, Andrew and Wohar, Mark E., Changes in the Relationship between Short‐Term Interest Rate, Inflation and Growth: Evidence from the UK, 1820–2014 (October 2019). Bulletin of Economic Research, Vol. 71, Issue 4, pp. 616-640, 2019, Available at SSRN: https://ssrn.com/abstract=3590673 or http://dx.doi.org/10.1111/boer.12199

Erdenebat Bataa (Contact Author)

National University of Mongolia - Department of Economics ( email )

Baga of toyruu-ya 350994
Mongolia

Andrew Vivian

Loughborough University ( email )

The Business School
Ashby Road
Loughborough LE11 3TU
Great Britain

Mark E. Wohar

University of Nebraska at Omaha ( email )

Department of Economics
6708 Pine Street MH 332S
Omaha, NE 68182
United States
402-554-3712 (Phone)
402-554-2853 (Fax)

HOME PAGE: http://cba.unomaha.edu/faculty/mwohar/WEB/homepage.html

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