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How well does a limited participation model of the monetary transmission mechanism match UK data?

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  • Shamik Dhar
  • Stephen P Millard

Abstract

This paper analyses how well a 'limited participation' model of the monetary transmission mechanism is able to match important aspects of the UK economy. Given that the endogenous monetary policy rule being followed by the monetary authority is not explicitly modelled, the model might not be expected to match the correlations and variances in the data. However, subject to this caveat, the model is able to reproduce the stylised fact that there is little relationship between monetary aggregates and either output or inflation, even though the underlying cause of inflation is money growth. The money-income and money-inflation relationships vary substantially within the model depending on what type of shock is hitting the economy, a strong argument for using structural models of the monetary transmission mechanism in which shocks are identified. The model is also able to capture important features of the monetary transmission mechanism in the United Kingdom, as embodied in the responses of variables to monetary policy shocks.

Suggested Citation

  • 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.
    • Handle: RePEc:boe:boeewp:118
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp118.pdf
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    References listed on IDEAS

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    5. 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.
    6. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-353, May.
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    8. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
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    Cited by:

    1. Jerzy Pruski & Piotr Szpunar, 2008. "The monetary transmission mechanism in Poland," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 427-437, Bank for International Settlements.
    2. Andrew Brigden & Jonathan Thomas, 2003. "What does economic theory tell us about labour market tightness?," Bank of England working papers 185, Bank of England.

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