Bank of England (BoE), as an independent organization stimulates the economic growth, by maintaining the transparency of the monetary policies conducted and regulates financial and foreign markets. In this report, I studied the relativity of monetary policy led by the central bank to the economic growth achieved during 1990-2011 in the UK and the effectiveness of the transmission mechanism through the channels involved. I concluded that it [monetary policy] had a direct impact on price stability using the intermediate targets such as monetary aggregates and official rates and, thereby influenced on the short term money market rates, firm and individuals’ saving behaviors and total unemployment level in the specified periods. Further, I ran a vector autoregression (VAR) function over annual gross domestic product and broad money (M3) within the time range specified and found three-lagged-order optimal for the applied model. The 3 year long recession in the early phase of 1990, the dismissal of the UK from Exchange Rate Mechanism (ERM) (1992-7), the invasions into Afghanistan (2001) and Iraq (2003), the first appearance of credit crunch (2008-9) were reflected in impulse response function (IRF). Also, Granger causality test resulted in money as being an endogenous factor and I explained it with that that the granger’s test rather examines which phenomenon occurs first in a statistical viewpoint, than the real causality between series. The results of Lagrange Multiplier test for serial correlation in the residuals and joint significance test of coefficients were all positive at the selected lag-order and the model eigenvalues lied inside the circle. I also provided the forecasted values -generated by Stata software package- to money stock, GDP and interest rate and the values proved accurate only in a year time.
Keywords: Quantitative easing, Vector autoregression (VAR), Granger causality test, Impulse response function, Transmission Mechanism.
Inhaltsverzeichnis (Table of Contents)
- Abstract
- Introduction
- Literature Review
- Transmission Mechanism
- Data Source and Description
- Modeling
- Vector Autoregression (VAR)
- Impulse Response Function (IRF)
- Lagrange Multiplier Test for Autocorrelations
- Joint Significance Test of the VAR Coefficients
- Granger Causality
- Regression Results
- Concluding Remarks
- Reference List
- Appendix
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This report aims to analyze the effects of the Bank of England's monetary policy on the UK's economic growth between 1990 and 2011. It examines the effectiveness of the transmission mechanism, exploring the impact of monetary policy on price stability, short-term money market rates, individual and firm savings behavior, and the unemployment rate. The report utilizes a vector autoregression (VAR) model to analyze the relationship between GDP and broad money (M3), while also conducting Granger causality, Lagrange Multiplier, and joint significance tests. Key themes explored include:- The impact of UK monetary policy on economic growth.
- The effectiveness of the transmission mechanism through various channels.
- The role of monetary policy in achieving price stability.
- The relationship between broad money (M3) and GDP through a VAR model.
- The application of statistical tests to analyze the relationship between economic variables.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter introduces the objectives and scope of the report, outlining the analysis of the Bank of England's monetary policy between 1990 and 2011. It focuses on the transmission mechanism and its role in stabilizing prices and the balance of payments, with a specific emphasis on GDP, M3, and long-term bond rates.
- Literature Review: This chapter provides an overview of the UK's economic landscape between 1990 and 2011, highlighting key events like the early 1990s recession, the UK's departure from the ERM, and the 2008-2009 credit crunch. It examines the impact of political decisions, such as the introduction of the minimum wage and the granting of independence to the Bank of England, on the economy.
- Transmission Mechanism: This chapter defines and explains the transmission mechanism, detailing the processes by which monetary policy influences the economy. It explores four main channels: the interest rate channel, the exchange rate channel, the asset pricing channel, and the credit channel.
- Data Source and Description: This chapter discusses the data sources and their descriptive details, including the specific time period, variables used, and data collection methods.
- Modeling: This chapter focuses on the methodological approach employed to analyze the data, including the application of a vector autoregression (VAR) model. It outlines the structure and parameters of the VAR model, as well as the interpretation of its results.
- Vector Autoregression (VAR): This chapter delves into the details of the VAR model and its implementation, including the selection of the optimal lag order and the estimation of the model's coefficients.
- Impulse Response Function (IRF): This chapter explains the use of the IRF to analyze the dynamic response of economic variables to shocks within the VAR model. It discusses how the IRF reveals the impact of specific events on GDP, M3, and other relevant variables.
- Lagrange Multiplier Test for Autocorrelations: This chapter describes the Lagrange Multiplier test used to assess the presence of autocorrelation in the residuals of the VAR model. It emphasizes the importance of addressing autocorrelation to ensure the validity of the model's results.
- Joint Significance Test of the VAR Coefficients: This chapter details the joint significance test conducted to determine the overall significance of the VAR model's coefficients. It examines the statistical significance of the model's parameters, indicating the overall predictive power of the model.
- Granger Causality: This chapter introduces the concept of Granger causality and its application to the relationship between variables in the VAR model. It discusses the interpretation of Granger causality test results, specifically focusing on the direction of causality between economic variables.
- Regression Results: This chapter presents the regression results obtained from the VAR model. It discusses the estimated coefficients, their statistical significance, and the overall fit of the model.
Schlüsselwörter (Keywords)
This report focuses on the implications of UK monetary policy, specifically exploring the effectiveness of the Bank of England's policies on economic growth and the transmission mechanism. The primary keywords include: quantitative easing, vector autoregression (VAR), Granger causality test, impulse response function, and transmission mechanism. The study investigates the impact of monetary policy on key economic variables like GDP, broad money (M3), and interest rates.- Quote paper
- Nosirjon Juraev (Author), 2013, The Implications of UK Monetary Policy (1990-2012), Munich, GRIN Verlag, https://www.grin.com/document/266932
