Working Paper No. 434 Evolving UK and US macroeconomic dynamics through the lens of a model of deterministic structural change

Using a model of deterministic structural change, we revisit several topics in inflation dynamics explored previously using stochastic, time-varying parameter models. We document significant reductions in inflation persistence and predictability. We estimate that changes in the volatility of shocks were decisive in accounting for the great moderations of the United States and the United Kingdom. We also show that the magnitude and the persistence of the response of inflation and output to monetary policy shocks has fallen in these two countries. These findings should be of interest in those seeking to resolve theoretical debates about the sources of apparent nominal and real frictions in the macroeconomy, and the causes of the Great Moderation. JEL classification: C10, C14. (1) Queen Mary and Westfield College and Bank of England. Email: [email protected] (2) Bank of England. Email: [email protected] The views expressed in this paper are those of the authors, and not necessarily those of the Bank of England. This paper was finalised on 28 April 2011. The Bank of England’s working paper series is externally refereed. Information on the Bank’s working paper series can be found at www.bankofengland.co.uk/publications/workingpapers/index.htm Publications Group, Bank of England, Threadneedle Street, London, EC2R 8AH Telephone +44 (0)20 7601 4030 Fax +44 (0)20 7601 3298 email [email protected] © Bank of England 2011 ISSN 1749-9135 (on-line)