Abstract
This paper aims to present the long-run covariability between inflation and the interest rate of the United Kingdom by using a new method developed by Müller and Watson (2018) that eliminates the low-frequency problems. In this study, the validity of the Fisher hypothesis is investigated under structural break periods for the UK's economy. The analysis is carried out with monthly inflation and interest rate for six periods: Full sample (1920:1-2019:12), interwar years (1920:1-1939:8), fixed exchange rate (1952:1-1973:2), Post War II (1952:1-1992:9) and two different inflation targeting periods (1992:10-2008:8 and 1992:10-2019:12). The empirical finding suggests that the Fisher hypothesis holds for the United Kingdom in the long-run.
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