Dynamic Responses of the Economy to Monetary Shocks  in the United Kingdom

Abstract:

We study the dynamic responses of key macroeconomic variables to money supply and bank rate shocks in the UK economy.  Our study follows Sims (1992) for recent decades that include the financial crisis of 2008.   The Bank of England followed the Fed in taking an active role in managing the bank rate in the UK and employed quantitative easing during and post financial crisis in 2008.  Our work isolates the structural shocks to the money supply and the bank rate.  We examine the impulse responses of the bank rate, exchange rate, prices levels, and the industrial production deploying a structural vector autoregressive model (SVAR).  The variance decomposition results and impulse responses from the VECM and SVAR models show that the industrial production is responsive to monetary actions of the Bank of England.

Keywords: 

Monetary shocks; Bank rate; Structural VAR; UK economy; Impulse responses

JEL Classifications: 

E00, E10, E19

Citation as: 

Adrangi, B., H. Baade, and K. Raffiee(2019). "Dynamic Responses of the Economy to Monetary Shocks  in the United Kingdom", Review of Economics & Finance, vol.15, no.1, pp. 31-45.