The models in this paper present one obviously surprising result, that of the insignificant demand shock, occurring with both choices of proxy. Whilst this could mean that the modelling procedure is at fault, a more likely alternative is that the demand side has no influence on inflation, particularly when taken in context with the coefficient of core inflation being approximately one. This would imply that the economy is on a stable path at the natural level of employment with no shocks, hence previous inflation is a good guide for current inflation.

It is only in models encompassing the latter dates of the period that the coefficient of core inflation is only near one . In both equations (5) and (7), the earlier periods for structural breaks and subsets, the coefficient is less than one-half. In fact, equation (7) sees a value of 0.020675, which is evidence to accept a null that the core inflation coefficient equals zero. This suggests that little weight was given to past rates in the earlier period, perhaps because inflation was historically low and so individuals had low expectations.

On the supply side, incomes policy had a inconsistent effect on inflation, as identified through unexpected signs, but its theoretical effect is still debated over. The relative import price behaved much more as expected especially when examined in the smaller samples. Unsurprisingly there were significantly large coefficients in models covering the OPEC period.

The formal test carried out for a structural break found no evidence of any being present. This suggests that the determinants of inflation have not changed significantly over the period, which supports the findings of a stable path. From the subset equations (7), (8) and (9), whilst there being no formal test performed, there seems to be parameter consistency, with demand shocks continuing to be insignificant; a noticeable but not overly strong effect from incomes policy, albeit stronger in the last period; and a clearly dominant effect from relative import prices.

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J. L. Fallick and R. F. Elliott. "Incomes Policies, Inflation and Relative Pay: An Overview" in Incomes Policy, Inflation and Relative Pay. Edited by J. L. Fallick and R. F. Elliott. George Allen & Unwin.

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Acknowledgements for assistance.

Public Enquiries Group (HO-1)
Bank Of England
Threadneedle Street
London
EC2R 8AH

Prof J. P. Hutton
Giovanni Baiocchi
Timothy Hill
Alan J. Soady

Programmes Used

Navidata. Office of National Statistics.

OECD Database.

PC-GIVE. Written by Jurgen A Doornik and David F. Hendry. Oxford Institute of Economics and Statistics.

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