Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/72274
Authors: 
Reschreiter, Andreas
Year of Publication: 
2006
Series/Report no.: 
Reihe Ökonomie / Economics Series, Institut für Höhere Studien (IHS) 193
Abstract: 
This paper models the time-varying mean of the UK real and nominal short-term interest rate. Both rates mean revert to a time-varying central tendency in continuous-time interest rate models. Before and during British membership in the ERM, the mean of the real and nominal short rate have a strong negative correlation. Afterwards, when the UK implemented an inflation targeting policy, the mean of the real and nominal short rate are no longer negatively correlated, but instead have a strong positive correlation. The paper also reports empirical evidence of a relationship between the mean of the real and nominal short rate and inflation in the period before the departure from the ERM.
Subjects: 
ERM
inflation targeting
nominal and real rates
term structure model
UK
JEL: 
E52
F33
G12
Document Type: 
Working Paper

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