A small structural empirical model of the UK monetary transmission mechanism

Shamik Dhar, Darren Pain and Ryland Thomas

Bank of England working papers from Bank of England

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.

Date: 2000-05
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:113

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