UK inflation in the 1970s and 1980s: the role of output gap mismeasurement

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 December 2001

Working Paper no. 148
By Edward Nelson and Kalin Nikolov

Understanding the degree of measurement error in the estimates of the output gap available to policy-makers 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 exists, but an approximate series can be deduced from analysis of statistical releases and policy-makers’ statements. On this basis, we construct a real-time UK output gap series beginning in 1965 and are therefore able to obtain estimates of the extent of real-time output gap mismeasurement in the 1970s and 1980s. 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 to 5.5 percentage points to inflation in the 1980s.

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