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UK QE reconsidered: the real economy effects of monetary policy in the UK, 1990-2012 – an empirical analysis

UK QE reconsidered: the real economy effects of monetary policy in the UK, 1990-2012 – an empirical analysis
UK QE reconsidered: the real economy effects of monetary policy in the UK, 1990-2012 – an empirical analysis
Empirical studies of so called ‘unconventional’ monetary policy – ‘Quantitative Easing’ or ‘Large Scale Asset Purchases’ - since the North Atlantic Financial Crisis of 2007-2009 in the United Kingdom and elsewhere have mainly focussed on the effect of policy on intermediate variables rather than the stated ultimate goal of such policies, boosting nominal demand and GDP growth. Secondly and relatedly they tend to focus on the crisis and post-crisis period, a time of extraordinary economic and financial dislocation, which creates counterfactual and attribution problems and fails to capture typical macroeconomic lag dynamics. Adopting the approach of Voutsinas and Werner (2010), and building on Lyonnet and Werner’s (2012) study of UK QE, this paper addresses these weaknesses by 1) examining the impact of various different monetary policy instruments (including Quantitative Easing) directly on UK nominal GDP growth; and 2) using a quarterly time series beginning in the first quarter of 1990 and up to the last quarter of 2012 (92 observations in total). We use the Hendry ‘general-to-specific’ econometric methodology to estimate a parsimonious model. The results show that disaggregated bank credit to the real economy (households and firms) has the most significant impact on nominal GDP growth. Changes to the central bank’s interest rate, central bank reserves, and total central bank asset ratios drop out of the model as insignificant. The policy implication it that, as private banks continue to shrink their balance sheets in the UK and Europe following the North Atlantic Crisis of 2008, central banks might wish to consider ‘unconventional’ monetary policies that more directly boost credit to the real economy and thus nominal GDP growth
Centre for Banking, Finance and Sustainable Development, University of Southampton
Bernardo, Giovanni
8e18a74c-2264-4c39-a171-3acc3424724e
Ryan-Collins, Josh
9e17daf8-2b9b-4888-aaa6-8b5c3d02f2a0
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1
Bernardo, Giovanni
8e18a74c-2264-4c39-a171-3acc3424724e
Ryan-Collins, Josh
9e17daf8-2b9b-4888-aaa6-8b5c3d02f2a0
Werner, Richard A.
dc217378-eb19-4592-9be4-ab5f847b74a1

Bernardo, Giovanni, Ryan-Collins, Josh and Werner, Richard A. (2013) UK QE reconsidered: the real economy effects of monetary policy in the UK, 1990-2012 – an empirical analysis (Centre for Banking, Finance and Sustainable Development Policy Discussion Papers) Southampton, GB. Centre for Banking, Finance and Sustainable Development, University of Southampton

Record type: Monograph (Discussion Paper)

Abstract

Empirical studies of so called ‘unconventional’ monetary policy – ‘Quantitative Easing’ or ‘Large Scale Asset Purchases’ - since the North Atlantic Financial Crisis of 2007-2009 in the United Kingdom and elsewhere have mainly focussed on the effect of policy on intermediate variables rather than the stated ultimate goal of such policies, boosting nominal demand and GDP growth. Secondly and relatedly they tend to focus on the crisis and post-crisis period, a time of extraordinary economic and financial dislocation, which creates counterfactual and attribution problems and fails to capture typical macroeconomic lag dynamics. Adopting the approach of Voutsinas and Werner (2010), and building on Lyonnet and Werner’s (2012) study of UK QE, this paper addresses these weaknesses by 1) examining the impact of various different monetary policy instruments (including Quantitative Easing) directly on UK nominal GDP growth; and 2) using a quarterly time series beginning in the first quarter of 1990 and up to the last quarter of 2012 (92 observations in total). We use the Hendry ‘general-to-specific’ econometric methodology to estimate a parsimonious model. The results show that disaggregated bank credit to the real economy (households and firms) has the most significant impact on nominal GDP growth. Changes to the central bank’s interest rate, central bank reserves, and total central bank asset ratios drop out of the model as insignificant. The policy implication it that, as private banks continue to shrink their balance sheets in the UK and Europe following the North Atlantic Crisis of 2008, central banks might wish to consider ‘unconventional’ monetary policies that more directly boost credit to the real economy and thus nominal GDP growth

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Published date: 1 July 2013
Organisations: Centre for Digital, Interactive & Data Driven Marketing

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Local EPrints ID: 354307
URI: https://eprints.soton.ac.uk/id/eprint/354307
PURE UUID: 099fa65e-1ef7-4ffc-9202-b64d0c5998bc

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Date deposited: 08 Jul 2013 08:42
Last modified: 18 Jul 2017 03:57

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