THE ECONOMETRICS OF MACROECONOMIC MODELLING

Data input for interest rate rules

Figure 10.2 shows the variation in the variables we use in the different interest rate rules over the period 1995(1) to 2000(4). Underlying inflation A4put is headline inflation corrected for changes in excise duties and energy prices, and is clearly less volatile than headline CPI inflation during the 1990s, cf. Figure 10.2(a). Output growth picked up towards the end of the 1990s, and during 1997-98 we see from Figure 10.2(b) that the four-quarter output growth rate shifts rather abruptly. Figure 10.2(c) shows the development in three variables used in the ‘real-time’ rules, that is, the rate of unemployment, ut, annual wage growth, A4wt, and annual growth in nominal domestic credit A4ncrt. The potential volatility in the interest rate implied by a real-time rule based on wage growth can be anticipated by the hike in wages in 1998. Finally, Figure 10.2(d) shows the deviations from PPP, vt — (pt — pwt), which we use in the ‘open economy’ interest rate rules.