DP3047 What Does the UK's Monetary Policy and Inflation Experience Tell Us About the Transmission Mechanism?

Author(s): Edward Nelson
Publication Date: November 2001
Keyword(s): great inflation, taylor rule, transmission mechanism, UK Monetary policy
JEL(s): E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3047

This Paper provides a discussion of some aspects of aggregate supply and demand determination in the United Kingdom. It argues that: (1) UK policymakers in the 1960s and 1970s did not use the downward-sloping Phillips curve as a model of inflation or a guide to policy. The explanation proposed by Sargent (1999) for the US Great Inflation is therefore unlikely to account for the Great Inflation in the UK. (2) The proposition that inflation is a monetary phenomenon is fully consistent with the use of models in which money and other measures of monetary policy stance do not appear in the price-setting equations. (3) The UK exhibits a relationship between output and short-term real interest rates that is quite distinct from that observed in the US.