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Is the Response of the Bank of England to Exchange Rate Movements Frequency-Dependent?

Petre Caraiani and Rangan Gupta ()

No 201883, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we estimate a Small Open Economy Dynamic Stochastic General Equilibrium (SOEDSGE) model of the United Kingdom (UK), with the main focus being to test the hypothesis whether the Bank of England (BoE) responds to (frequency-dependent) exchange rate movements or not. For our purpose, we use an extended quarterly data set spanning the period of 1986:Q1 to 2018:Q1, which in turn includes the zero lower bound situation, and also estimate the SOEDSGE model based on observable data decomposed into its frequency components, under the presumption that central banks is more comfortable in responding to long-term fundamental movements in exchange rates. We find that the BoE not only responds to exchange rate movements in a statistically significant manner, but also that it primarily focuses on long-term movements of currency depreciations more strongly than short-term fluctuations of the same.

Keywords: Small Open Economy DSGE Model; Monetary Policy Rule; Exchange Rate; Structural Estimation; Bayesian Analysis; Wavelets (search for similar items in EconPapers)
JEL-codes: C32 E52 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-12
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