DP2999 UK Inflation in the 1970s and 1980s: The Role of Output Gap Mismeasurement

Author(s): Edward Nelson, Kalin Nikolov
Publication Date: October 2001
Keyword(s): great inflation, inflation targeting, interest rate rules, output gap, potential output, real-time data, Taylor rule, UK monetary policy
JEL(s): E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2999

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.