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Market beliefs about the UK monetary policy life-off horizon: a no-arbitrage shadow rate term structure model approach

Author

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  • Andreasen, Martin M

    (Aarhus University and CREATES)

  • Meldrum, Andrew

    (Bank of England)

Abstract

We use a no-arbitrage shadow rate term structure model to estimate investors’ views about the timing of monetary policy ‘lift-off’ in the United Kingdom over time. Our estimates show that when the UK policy rate was first cut to 0.5%, in March 2009, investors believed that it would remain at the lower bound only for a short period, with an estimated probability of 70% that the policy rate would rise above 0.75% within twelve months. The estimated median horizon for policy rate lift-off rose sharply in 2012 but fell back to thirteen months by the end of our sample period, in May 2014.

Suggested Citation

  • Andreasen, Martin M & Meldrum, Andrew, 2015. "Market beliefs about the UK monetary policy life-off horizon: a no-arbitrage shadow rate term structure model approach," Bank of England working papers 541, Bank of England.
    • Handle: RePEc:boe:boeewp:0541
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Lemke, Wolfgang & Vladu, Andreea L., 2016. "Below the zero lower bound: A shadow-rate term structure model for the euro area," Discussion Papers 32/2016, Deutsche Bundesbank.
    2. Meldrum, Andrew & Roberts-Sklar, Matt, 2015. "Long-run priors for term structure models," Bank of England working papers 575, Bank of England.
    3. Junttila, Juha & Perttunen, Jukka & Raatikainen, Juhani, 2021. "Keep the faith in banking: New evidence for the effects of negative interest rates based on the case of Finnish cooperative banks," International Review of Financial Analysis, Elsevier, vol. 75(C).
    4. Hansen, Stephen & McMahon, Michael & Tong, Matthew, 2019. "The long-run information effect of central bank communication," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 185-202.
    5. Kortela, Tomi, 2016. "A shadow rate model with time-varying lower bound of interest rates," Research Discussion Papers 19/2016, Bank of Finland.
    6. Geiger, Felix & Schupp, Fabian, 2018. "With a little help from my friends: Survey-based derivation of euro area short rate expectations at the effective lower bound," Discussion Papers 27/2018, Deutsche Bundesbank.
    7. Kortela, Tomi, 2016. "A shadow rate model with time-varying lower bound of interest rates," Bank of Finland Research Discussion Papers 19/2016, Bank of Finland.
    8. Malik, Sheheryar & Meldrum, Andrew, 2016. "Evaluating the robustness of UK term structure decompositions using linear regression methods," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 85-102.
    9. Schupp, Fabian, 2020. "The (ir)relevance of the nominal lower bound for real yield curve analysis," Working Paper Series 2476, European Central Bank.
    10. Elliott, David & Noss, Joseph, 2015. "Estimating market expectations of changes in Bank Rate," Bank of England Quarterly Bulletin, Bank of England, vol. 55(3), pages 273-282.
    11. repec:zbw:bofrdp:2016_019 is not listed on IDEAS

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    More about this item

    Keywords

    Shadow rate models; sequential regression estimation; policy lift-off; zero lower bound.;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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