Abstract
This article estimates a two-factor term structure model to analyze the time-varying mean-reverting levels of the UK real and nominal short-term interest rates. Before and during British membership in the ERM, the mean-reverting levels of real and nominal short rates have a strong negative correlation. Afterward, when the UK implemented an inflation targeting policy, the mean-reverting levels have a strong positive correlation. The article also reports empirical evidence of a link between the time-varying central tendencies and inflation in the disinflation period before the implementation of the inflation targeting policy.
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Reschreiter, A. Real and nominal UK interest rates, ERM membership, and inflation targeting. Empir Econ 40, 559–579 (2011). https://doi.org/10.1007/s00181-010-0345-z
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DOI: https://doi.org/10.1007/s00181-010-0345-z