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

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Listed author(s):
  • 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.

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Paper provided by Bank of England in its series Bank of England working papers with number 118.

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Date of creation: Jun 2000
Handle: RePEc:boe:boeewp:118
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  1. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
  2. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-1136, November.
  3. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Modeling money," Working Paper Series, Macroeconomic Issues WP-97-17, Federal Reserve Bank of Chicago.
  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.
  7. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  8. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
  9. 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.
  10. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
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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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