918 Monetary Policy, Beliefs, Unemployment and Inflation
18.4.2.1 The wage push variables 929
18.4.2.2 The price push variables 933
18.4.2.3 Cointegration results for unemployment 934
18.5 Applying the Beliefs model to the UK 935
18.5.1 The model 936
18.5.2 Some model implications 937
18.5.2.1 Model solutions 937
18.5.2.2 Inflation with a time-varying natural rate 937
18.5.2.3 Relating the results to the UK since 1980 939
18.6 Conclusions and proposals for future work 941
18.7 Appendix: Data – definitions and sources 943
18.1 Introduction: inflation and unemployment in the UK
Inflation in the UK over the last 25 years has varied substantially (Figure 18.1). It
had a period of seriously high inflation for a decade starting from the early 1970s,
with two distinct episodes each coinciding with a huge increase in oil prices.^1
Although this phase was brought under control towards the end of the 1980s,
there followed a second – smaller – surge from then until the early 1990s. Although
this second phase was less serious than each of the two peaks of the first, it was
nevertheless important enough for the UK to join the Exchange Rate Mechanism
(ERM) in an effort to control it.
From the date of its departure from the ERM, inflation, growth and unemploy-
ment have been unusually good by UK standards although, as Figure 18.2 shows,
0510152025301971Q11972Q41974Q31976Q21978Q11979Q41981Q31983Q21985Q11986Q41988Q31990Q21992Q11993Q41995Q31997Q21999Q12000Q42002Q32004Q22006Q1Percent per annumFigure 18.1 RPI inflation in the UK