Do we need nominal rigidity? Accounting for exchange rate and inflation behaviour within a classical framework

In section two of the thesis the objective is to show that the degree of inflation persistence -- that is the extent to which an inflation shock does not fade away in subsequent quarters -- is not an inherent fixed characteristic of an economy, but if fact depends on the stability and transparency of the monetary policy regime in place. Given the large econometric evidence of high inflation persistence for the US and other OECD countries, many macroeconomists have concluded that high inflation persistence is a 'stylised fact' and that furthermore it is evidence for a 'New Keynesian' Phillips Curve in which inflation depends to a high degree on past inflation -- 'nominal rigidity'. To examine these claims for the UK, I begin by estimating regressions of inflation on its own past values for separate sample periods, for each of which the monetary policy regime was differen