On May 6, 1997, the then-chancellor of the exchequer in Great Britain, Gordon Brown, announced a major
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Mark Spiegel, an economist with the Federal Reserve Bank of San Francisco, studied how the British bond market reacted to the policy change. He compared the interest rate changes on two types of long-term bonds: British bonds that are automatically adjusted (or indexed) for inflation (such as TIPS in the United States) and bonds that are not. The difference between the two interest rates primarily reflects expectations of inflation. Thus, if the gap narrowed following the policy announcement, this would be evidence that the new policy reduced expectations of inflation. If it did not, the announced policy would have had no effect on inflation expectations.
After the announcement, the gap narrowed, and Spiegel concluded the announcement did, indeed, cause expectations about inflation to fall by about half a percentage.
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Macroeconomics Principles Applications And Tools
ISBN: 9780134089034
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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