UK monetary policy in an estimated DSGE model with financial frictions

Lyu, Juyi, Le, Vo Phuong Mai ORCID: https://orcid.org/0000-0003-3374-9694, Meenagh, David ORCID: https://orcid.org/0000-0002-9930-7947 and Minford, Anthony ORCID: https://orcid.org/0000-0003-2499-935X 2023. UK monetary policy in an estimated DSGE model with financial frictions. Journal of International Money and Finance 130 , 102750. 10.1016/j.jimonfin.2022.102750

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Abstract

This paper develops a dual-state monetary DSGE model that accommodates a refined financial accelerator to analyze UK monetary policy. Unconventional monetary policy (QE) is interpreted as expanding the central bank’s purchases of bonds using M0 to offset financial disruptions at the ZLB. Within a collateral-augmented costly state verification framework, M0 enters the financial accelerator as the cheapest collateral and reduces the cost of credit. The model is tested and estimated using indirect inference and found to fit the UK data for key variables over 1993-2016. We find that while financial shocks are significant, it is productivity shocks that had slowed down the recovery for 2009-2012. Alternative monetary regimes are evaluated and compared.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	0261-5606
Date of First Compliant Deposit:	3 October 2022
Date of Acceptance:	2 October 2022
Last Modified:	08 May 2023 02:36
URI:	https://orca.cardiff.ac.uk/id/eprint/153005

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