Journal of Money, Credit, and Banking

In this paper we use tests for multiple structural breaks at unknown points in the sample, and band-pass filtering techniques, to investigate changes in U.K. 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. Both for real GDP growth, and for three measures of inflation, we identify break dates around the time of the introduction of inflation targeting, in October 1992. For all four series, the estimated innovation variance over the most recent sub-period is the lowest of the post-WWII era. The volatility of the band-pass filtered macroeconomic indicators we consider is, after 1992, almost always lower than either during the Bretton Woods regime, or over the 1971-92 period, often, like in the case of inflation and real GDP, markedly so. The Phillips correlation appears to have undergone significant changes over the last 50 years, from being unstable in the 1970s, to slowly stabilising from the beginning of the 1980s onwards. After 1992, the correlation exhibits, by far, the greatest extent of stability of the post-WWII era.