Does the perception of the transmission mechanism differbetween the market and the Central bank and does theCentral banks’ have less credibility in their forecasted effectof monetary policy instruments at low short nominal keyinterest rates?
Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
This thesis investigates the difference in the perception of the transmission mechanism between the market and the Bank of England (BoE), at high versus low short nominal key interest rates during the 2000’s. The perception is measured by comparing the market’s inflation expectations, measured by forward Break-Even Inflation Rate (forward BEIR), and the inflation forecastsmade by the BoE. High/low short nominal key interest rates are defined using the Taylor rule, which splits the sample in two regimes’. The divergence between the inflation forecasts is larger at low short nominal key interest rates, indicating that a low short nominal key interest rate regime does induce a larger difference in the perception of the transmission mechanism with the market expecting larger effects than the BoE. The thesis also examines if the BoE’s credibility is affected at different interest rates regimes. Causally interpreting the effect of the BoE’s inflation forecasts on the markets inflation expectations, using an instrumental variable regression, indicates no statistically significant relationship between inflation forecasts and market’s inflation expectations at high short nominal key interest rates, but a statistically significant relationship at low short nominal key interest rates. These results indicate that the BoE has credibility in their forecasted effect of the monetary policy instruments available at low short nominal key interest rates. Given the different monetary policy instruments available at low versus high short nominal key interest rates, the results of this thesis indicate to the authors that the BoE has credibility in their forecasted effect of Quantitative easing (QE).
Place, publisher, year, edition, pages
Credibility, Transmission mechanism, Monetary policy, Quantitative easing (QE)
IdentifiersURN: urn:nbn:se:uu:diva-317478OAI: oai:DiVA.org:uu-317478DiVA: diva2:1081855
Carlsson, Mikael, Professor
Guvå, Tomas, Universitetslektor