The Impact of Monetary Policy in the UK on the Relationship Between the Term Structure of Interest Rates and Future Inflation

Abstract

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.