THE IMPACT OF MONETARY POLICY IN THE UK ON THE RELATIONSHIP BETWEEN THE
TERM STRUCTURE OF
INTEREST RATES AND FUTURE INFLATION
The link between London interbank interest rates and future inflation
in the UK is investigated over a period which includes several changes
in monetary policy regime. Recursive estimation is used to identify appropriate
breakpoints in the sample and a moving-block bootstrap is used to facilitate
correct inference. The general conclusion which emerges is that the informational
content of the term structure is sensitive to changes in monetary policy.
In particular, the relationship between interest rates and future inflation
is found to break down after 1985.