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Prepared by Ramana Ramaswamy and Josef Baumgartner.
The evolution of the new framework in the United Kingdom up to 1994, including also its transparency features, is described in detail in SM/94/257, Chapter VI.
The relationship between the output gap and inflation is examined in Chapter V.
Hysteresis describes a situation where temporary shocks have persistent effects. Well known examples of this are in the labor market and international trade. In the labor market for instance, a temporary adverse shock which increases unemployment can prove to be persistent; the unemployed have declining probabilities of future re-employment due to demotivation and atrophying skills. Similarly, in international trade, a temporary exchange rate shock can lead to a permanent loss of export markets, as competitors make sustained gains through brand recognition and other related factors. Such situations are also said to be characterized by path dependency--the starting point influences the evolution of the long run dynamics (see Krugman (1994) for an interesting discussion of these issues). In these circumstances, accommodative monetary policy can, at times, have an impact on activity in the longer run by influencing the starting point itself.
Woodford (1994) has been a strong proponent of not ignoring structural information in inflation targeting.
The results of these tests are available with the authors and can be provided on request.
Tables giving the results of the Granger causality tests and variance decompositions in a multi-variate set up can be provided by the authors on request.
Detailed tables on these results can be provided by the authors on request.