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Monetary transmission channels, monetary regimes and consumption behaviour

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  • S. Sgherri

Abstract

This paper explores the characteristics of the monetary transmission mechanism in the UK, as portrayed by the National Institute's Domestic Econometric Model (NiDEM). Sensitivity to different monetary policy regimes and to alternative models of consumers' expenditure is assessed. The methodology adopted quantifies not only the total impact of a temporary monetary shock on the main GDP components, but also the contributions of the various transmission channels. Our analysis supports the evidence that the interest sensitivity of consumption becomes significantly lower when consumers `excessively discount' the future. More interestingly, we note that monetary shocks have relatively large effects on the real economy through their repercussions on fiscal variables; this is more obvious when the exchange rate is fixed and departures from Ricardian equivalence are enhanced.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 602.

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Date of creation: 1999
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Handle: RePEc:dnb:wormem:602

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Keywords: Consumption; monetary policy regimes; macroeconometric modelling.;

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  1. Muellbauer, John & Murphy, Anthony, 1997. "Booms and Busts in the UK Housing Market," Economic Journal, Royal Economic Society, vol. 107(445), pages 1701-27, November.
  2. Gerlach, Stefan & Smets, Frank, 1995. "The Monetary Transmission Mechanism: Evidence from the G-7 Countries," CEPR Discussion Papers 1219, C.E.P.R. Discussion Papers.
  3. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  4. Maclennan, Duncan & Muellbauer, John & Stephens, Mark, 1998. "Asymmetries in Housing and Financial Market Institutions and EMU," Oxford Review of Economic Policy, Oxford University Press, vol. 14(3), pages 54-80, Autumn.
  5. Steven A. Symansky & Douglas Laxton & Hamid Faruqee, 1996. "Government Debt, Life-Cycle Income and Liquidity Constrains," IMF Working Papers 96/140, International Monetary Fund.
  6. Wren-Lewis, Simon, et al, 1996. "The Macroeconomic Effects of Fiscal Policy: Linking an Econometric Model with Theory," Economic Journal, Royal Economic Society, vol. 106(436), pages 543-59, May.
  7. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  8. Dale, Spencer & Haldane, Andrew G., 1995. "Interest rates and the channels of monetary transmission: Some sectoral estimates," European Economic Review, Elsevier, vol. 39(9), pages 1611-1626, December.
  9. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  10. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  11. Hayashi, Fumio, 1982. "The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 895-916, October.
  12. Church, Keith B & Smith, Peter N & Wallis, Kenneth F, 1994. "Econometric Evaluation of Consumers' Expenditure Equations," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 71-85, Summer.
  13. Muellbauer, John, 1994. "The Assessment: Consumer Expenditure," Oxford Review of Economic Policy, Oxford University Press, vol. 10(2), pages 1-41, Summer.
  14. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 15-64, 04.
  15. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
  16. Julia Darby & Jonathan Ireland, 1994. "Consumption, Forward Looking Behaviour and Financial Deregulation," Working Papers Series 94/5, University of Stirling, Division of Economics.
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Cited by:
  1. McAdam, Peter & Morgan, Julian, 2001. "The monetary transmission mechanism at the euro-area level: issues and results using structural macroeconomic models," Working Paper Series 0093, European Central Bank.
  2. Filippo Altissimo & Alberto Locarno & Stefano Siviero, 2002. "Dealing with forward-looking expectations and policy rules in quantifying the channels of transmission of monetary policy," Temi di discussione (Economic working papers) 460, Bank of Italy, Economic Research and International Relations Area.
  3. Ana María Iregui & Ligia Alba Melo B., 2009. "La transmisión de la política monetaria sobre el consumo en presencia de restricciones de liquidez," BORRADORES DE ECONOMIA 005254, BANCO DE LA REPÚBLICA.

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