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A small structural empirical model of the UK monetary transmission mechanism

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  • Shamik Dhar
  • Darren Pain
  • Ryland Thomas

Abstract

In this paper a structural empirical model of the UK monetary transmission mechanism is estimated, which can be used for policy analysis and forecasting. A small system is estimated containing eight variables that theoretically have an important role in the transmission mechanism. The paper then attempts to decompose the movements of each of these variables into a small number of independent underlying forcing processes or 'shocks', with a well-defined economic interpretation. In addition to identifying shocks to productivity, domestic demand, external demand and the foreign exchange risk premium, the paper distinguishes between several types of monetary shock. In particular, a distinction is made between 'permanent' monetary policy shocks, attributable to changes in the underlying nominal target of the authorities, and 'temporary' policy shocks, reflecting either policy 'errors' or transitory deviations from the authorities' reaction function. A financial intermediation shock is also identified reflecting changes in the provision of credit by the banking system and the degree of financial liberalisation. The paper goes on to demonstrate some of the practical uses of the model, which include estimating output and liquidity gaps, historical decompositions of the data and conditional forecasting.

Suggested Citation

  • Shamik Dhar & Darren Pain & Ryland Thomas, 2000. "A small structural empirical model of the UK monetary transmission mechanism," Bank of England working papers 113, Bank of England.
    • Handle: RePEc:boe:boeewp:113
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    1. Vittorio Corbo & José Tessada, 2002. "Growth and Adjustment in Chile: A Look at the 1990s," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.),Economic Growth: Sources, Trends, and Cycles, edition 1, volume 6, chapter 14, pages 465-522, Central Bank of Chile.
    2. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
    3. Céline Gauthier & Fuchun Li, 2005. "Linking real activity and financial markets: the first steps towards a small estimated model for Canada," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 253-72, Bank for International Settlements.
    4. Katrin Assenmacher-Wesche, 2008. "Modeling Monetary Transmission in Switzerland with a Structural Cointegrated VAR Model," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(II), pages 197-246, June.
    5. Céline Gauthier & Fuchun Li, 2006. "Linking Real Activity and Financial Markets: The Bonds, Equity, and Money (BEAM) Model," Staff Working Papers 06-42, Bank of Canada.
    6. Mª Pilar Martínez-Ruiz & Ana Isabel Jiménez-Zarco & Alicia Izquierdo-Yusta, 2012. "El efecto de la situación económica actual en el nivel máximo de satisfacción del consumidor y el comportamiento de la clientela," DOCFRADIS Working Papers 1202, Catedra Fundación Ramón Areces de Distribución Comercial, revised Mar 2012.
    7. International Monetary Fund, 2001. "Switzerland: Selected Issues," IMF Staff Country Reports 2001/075, International Monetary Fund.
    8. Paolo PAESANI, 2003. "Will the Monetary Pillar Stay? A Few Lessons from the UK," Economics Working Papers ECO2003/10, European University Institute.
    9. Martha Misas Arango & Enrique López Enciso & Diego Vásquez Escobar, 2004. "Tendencias Estocásticas Comunes y Fluctuaciones en la Economía Colombiana: 1950-2002," Borradores de Economia 275, Banco de la Republica de Colombia.
    10. Bruggeman, Annick & Donnay, Marie, 2003. "A monthly monetary model with banking intermediation for the euro area," Working Paper Series 264, European Central Bank.
    11. Martha Misas Arango & Enrique López Enciso & Diego Vásquez Escobar, 2004. "Tendencias Estocásticas Comunes y Fluctuaciones en la Economía Colombiana: 1950-2002," Borradores de Economia 3550, Banco de la Republica.
    12. Celine Gauthier & Virginie Traclet, 2004. "Do Domestic Macroeconomic Factors Play a Role in Determining Long-Term Nominal Interest Rates? Application in the Case of a Small Open-Economy," Money Macro and Finance (MMF) Research Group Conference 2004 90, Money Macro and Finance Research Group.
    13. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
    14. Shamik Dhar & Stephen P Millard, 2000. "How well does a limited participation model of the monetary transmission mechanism match UK data?," Bank of England working papers 118, Bank of England.
    15. Morana, Claudio, 2004. "The Japanese stagnation: an assessment of the productivity slowdown hypothesis," Japan and the World Economy, Elsevier, vol. 16(2), pages 193-211, April.
    16. Mark S Astley & Tony Yates, 1999. "Inflation and real disequilibria," Bank of England working papers 103, Bank of England.
    17. Bridges, Jonathan & Thomas, Ryland, 2012. "The impact of QE on the UK economy – some supportive monetarist arithmetic," Bank of England working papers 442, Bank of England.
    18. Cassola, Nuno & Morana, Claudio, 2004. "Monetary policy and the stock market in the euro area," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 387-399, April.
    19. Bean, Charles & Larsen, Jens D. J. & Nikolov, Kalin, 2002. "Financial frictions and the monetary transmission mechanism: theory, evidence and policy implications," Working Paper Series 0113, European Central Bank.

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