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We outline a number of 'stylised' facts on the UK business cycle obtained from analysis of the long-run UK annual dataset. The findings are to some extent standard. Consumption and investment are pro-cyclical, with productivity playing a dominant role in explaining business cycle fluctuations at all horizons. Money neutrality obtains over the long run but there is clear evidence of non-neutrality over the short run, particularly at the business cycle frequencies. Business cycle relationships with the external sector via the real exchange rate and current account are notable. Postwar, the price level is counter-cyclical and real wages are pro-cyclical, as are nominal interest rates. Modern general equilibrium macroeconomic models capture many of these patterns.

In a New Keynesian macroeconomic model under credible commitment, price level targeting dominates inflation targeting. But with sufficient inflation aversion the inflation–targeting central bank can produce quantitatively similar results to one targeting the price level. The current degree of inflation aversion demonstrated by the Bank of England may be sufficient to reap the benefits of price level targeting.

We discuss a time invariant policy which delivers the unconditionally optimal outcomes in purely forward-looking models and Ramsey outcomes in purely backward-looking models. This policy is a product of interaction between two institutions with distinct responsibilities. Motivated by Brendon and Ellison (2015), we think of them as arms of government. One institution is responsible for 'forward guidance', setting rules which are necessary and sufficient to determine private expectations. The second institution implements optimal policy taking expectations as given. The forward guidance rules are designed to maximise the unconditional expectation of the social objectives.

Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions with those investing in risky equity. Integration eliminates a credit spread, reducing aggregate banking sector profitability; so while integration increases output it also entails larger, more frequent bailouts of retail customers. Bailouts boost economic activity but are costly. The optimal structure of banking depends on the efficiency of government intervention, the competitiveness of the banking sectors and shocks. Separated institutions are preferred when government bailouts are costly. Optimal bank regulation tolerates profits at investment and universal banks to limit bailouts, but imposes strict antitrust on retail banks.

Should we break up banks and limit bailouts? We study vertical integration of deposit-taking institutions with those investing in risky equity. Integration eliminates a credit spread, reducing aggregate banking sector profitability; so while integration increases output it also entails larger, more frequent bailouts of retail customers. Bailouts boost economic activity but are costly. The optimal structure of banking depends on the efficiency of government intervention, the competitiveness of the banking sectors and shocks. Separated institutions are preferred when government bailouts are costly. Optimal bank regulation tolerates profits at investment and universal banks to limit bailouts, but imposes strict antitrust on retail banks.

This paper constructs a consistent series for the market value of UK government debt over almost 300 years, analysing how monetary and fiscal policy affect the path of the UK price level. Specifically, it examines the interactions between debts, deficits, the monetary base and the price level. Overall, the price level has been closely related to the evolution of the base money supply. Across different sample periods, there is little econometric evidence that fiscal policy has affected the course of the price level (or of the exchange rate under the Gold Standard). Government debt has not significantly affected the base money stock, either.

Central bank independence is widely thought be a sine qua non of a credible commitment to price stability. The surprise decision by the UK government to grant operational independence to the Bank of England in 1997 affords us a natural experiment with which to gauge the impact on the yield curve from the adoption of central bank independence. We document the extent to which the decision to grant independence was 'news' and illustrate that the reduction in medium‐ and long‐term nominal interest rates was some 50 basis points, which we show to be consistent with a sharp increase in policy‐maker's aversion to inflation deviations from target. We therefore suggest that central bank independence represents one of the clearest signals available to elected politicians about their preferences on the control of inflation.

Following Hall (Journal of Labor Economics, Vol. 15 (1997), pp. S223–S250) it is increasingly common to incorporate preference, as well as productivity, perturbations in calibrated general equilibrium models. We assess the performance of a small open economy stochastic growth model (based on the Blanchard–Yaari framework) under alternative driving processes. Whilst both models provide familiar descriptions of the aggregate economy, we find that the model driven by productivity disturbances has clear advantages in explaining the behaviour towards foreign asset accumulation.