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Monetary policy, trade-offs and the transmission of UK Monetary Policy

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  • Kavanagh, Ella
  • Zhu, Sheng
  • O’Sullivan, Niall

Abstract

We provide a new method to model changes in monetary policy of the Bank of England (BoE) as well as the impact of these changes on UK economy. This is important as central bankers have widened the range of instruments in their monetary policy toolbox. Specifically, we estimate a proxy for the monetary policy stance and then analyse a time-varying parameter vector autoregressive with stochastic volatility model to explain the BoE’s trade-offs when making policy decisions and as well as to demonstrate dynamic impacts of monetary policy on inflation and economic growth. The empirical results show that our estimated monetary policy proxy is better at capturing the BoE’s policy when the interest rate lower bound becomes binding.

Suggested Citation

  • Kavanagh, Ella & Zhu, Sheng & O’Sullivan, Niall, 2022. "Monetary policy, trade-offs and the transmission of UK Monetary Policy," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1128-1147.
    • Handle: RePEc:eee:jpolmo:v:44:y:2022:i:6:p:1128-1147
    DOI: 10.1016/j.jpolmod.2022.10.006
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    More about this item

    Keywords

    Monetary policy proxy; Effective lower bound; Time-varying parameter vector autoregressive;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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