Working Paper No. 232
By Luca Benati
This paper uses tests for multiple structural breaks at unknown points in the sample period, and band-pass filtering techniques, to investigate changes in UK economic performance since the end of World War II. Empirical evidence suggests that the most recent decade, associated with the introduction of an inflation-targeting regime, has been significantly more stable than the previous post-WWII era. For real GDP growth, and for three measures of inflation, break dates are identified at around the time of the introduction of inflation-targeting, in October 1992. For all four series, the estimated innovation variance over the most recent subperiod has been the lowest of the post-WWII era. The volatility of the band-pass filtered macroeconomic indicators considered has been, after 1992, almost always lower than either during the Bretton Woods regime or the 1971-92 period; often, as in the cases of inflation and real GDP, markedly so. The Phillips correlation appears to have undergone significant changes over the past 50 years, from being unstable in the 1970s, to slowly stabilising from the beginning of the 1980s onwards. After 1992, the correlation has exhibited by far the greatest degree of stability during the post-WWII era.