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Deflation probability and the scope for monetary loosening in the United Kingdom

Alex Haberis (), Riccardo M. Masolo and Kate Reinold

No 627, Bank of England working papers from Bank of England

Abstract: In this paper, we use an estimated DSGE model of the UK economy to investigate perceptions of the effectiveness of monetary policy since the onset of the 2007–08 financial crisis in a number of measures of deflation probability — the Survey of Economic Forecasts, financial-market option prices, and the Bank of England's Monetary Policy Committee’s (MPC) forecasts. To do so, we use stochastic simulations of the model to generate measures of deflation probability in which the effectiveness of monetary policy to offset deflationary shocks is affected by different assumptions about the existence and level of a lower bound on policy rates. We find that measures of deflation probability are consistent with the perception that the MPC was not particularly constrained in its ability to offset deflation shocks in the post-crisis period.

Keywords: Deflation; forecasting and simulation; models and applications; interest rates; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E37 E43 E47 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2016-11-04
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Journal Article: Deflation Probability and the Scope for Monetary Loosening in the United Kingdom (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0627

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