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Modelling the discrete and infrequent official interest rate change in the UK

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  • Tena Horrillo, Juan de Dios
  • Otranto, Edoardo

Abstract

This paper is an empirical analysis of the manner in which official interest rates are determined by the Bank of England. We use a nonlinear framework that allow for the separate study of factors affecting the magnitude of positive and negative interest rate changes as well as their probabilities. Using this approach, new kinds of monetary shocks are defined and used to evaluate their impact on the UK economy. Among them, unanticipated negative interest rate changes are especially important. The model generalizes previous approaches in the literature and provides a rich methodology to understand central banks' decisions and their consequences.

Suggested Citation

  • Tena Horrillo, Juan de Dios & Otranto, Edoardo, 2006. "Modelling the discrete and infrequent official interest rate change in the UK," DES - Working Papers. Statistics and Econometrics. WS ws062007, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:ws062007
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    References listed on IDEAS

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    1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    2. Ruge-Murcia, Francisco J., 2003. "Does the Barro-Gordon model explain the behavior of US inflation? A reexamination of the empirical evidence," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1375-1390, September.
    3. Alex Cukierman & Stefan Gerlach, 2003. "The inflation bias revisited: theory and some international evidence," Manchester School, University of Manchester, vol. 71(5), pages 541-565, September.
    4. Cukierman, A., 1999. "The Inflation Bias Result Revisited," Papers 38-99, Tel Aviv.
    5. repec:sae:niesru:v:161:y::i:1:p:84-89 is not listed on IDEAS
    6. Edoardo Otranto & Giampiero Gallo, 2002. "A Nonparametric Bayesian Approach To Detect The Number Of Regimes In Markov Switching Models," Econometric Reviews, Taylor & Francis Journals, vol. 21(4), pages 477-496.
    7. Salazar, Eduardo & Smith, Richard & Weale, Martin & Wright, Stephen, 1997. "A Monthly Indicator of GDP," National Institute Economic Review, National Institute of Economic and Social Research, vol. 161, pages 84-89, July.
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    Cited by:

    1. J. Tena & E. Otranto, 2008. "A Realistic Model for Official Interest Rates," Working Paper CRENoS 200802, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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