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UK monetary policy in an estimated DSGE model with financial frictions

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  • Lyu, Juyi
  • Le, Vo Phuong Mai
  • Meenagh, David
  • Minford, Patrick

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.

Suggested Citation

  • Lyu, Juyi & Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2023. "UK monetary policy in an estimated DSGE model with financial frictions," Journal of International Money and Finance, Elsevier, vol. 130(C).
    • Handle: RePEc:eee:jimfin:v:130:y:2023:i:c:s026156062200153x
    DOI: 10.1016/j.jimonfin.2022.102750
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    Cited by:

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    2. Sun, Chuanwang & Xu, Zhehong & Zheng, Hongwei, 2023. "Green transformation of the building industry and the government policy effects: Policy simulation based on the DSGE model," Energy, Elsevier, vol. 268(C).

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