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Monetary Conditions Indices for the UK: A Survey

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  • Nicoletta Batini
  • Kenny Turnbull

Abstract

Monetary Conditions Indices (MCIs) are weighted averages of changes in an interest rate and an exchange rate relative to their values in a base period. A few central banks calculate MCIs for use in monetary policy. Although the Bank of England does not calculate such an index, several international organizations as well as financial corporations construct MCIs for the UK on a regular basis. In this article we survey those indices and compare their performance. We also suggest an alternative MCI for the UK to be used as a coincident indicator of stance, obtained estimating and simulating a small-scale macro-econometric model over the period 1984 Q4-1999 Q3. To overcome familiar criticisms of MCIs, our measure innovates upon existing MCIs in several respects. In this sense it may be more informative than those in understanding whether an existing level of interest rates, given the existing level of sterling, makes monetary policy “tighter” or “looser” than in previous periods.

Suggested Citation

  • Nicoletta Batini & Kenny Turnbull, 2000. "Monetary Conditions Indices for the UK: A Survey," Discussion Papers 01, Monetary Policy Committee Unit, Bank of England.
    • Handle: RePEc:mpc:wpaper:01
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    References listed on IDEAS

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    1. Charles Freedman, 1995. "The role of monetary conditions and the monetary conditions index in the conduct of policy [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Autumn), pages 53-59.
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    1. repec:hal:spmain:info:hdl:2441/6156 is not listed on IDEAS
    2. Muhamed Zulkhibri Abdul Majid, 2012. "Measuring monetary conditions in a small open economy: the case of Malaysia," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 218-231, July.
    3. Coşkun Akdeniz, 2021. "Construction of the Monetary Conditions Index with TVP-VAR Model: Empirical Evidence for Turkish Economy," Springer Books, in: Burcu Adıgüzel Mercangöz (ed.), Handbook of Research on Emerging Theories, Models, and Applications of Financial Econometrics, edition 1, pages 215-228, Springer.
    4. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    5. Ndiaye, Ndeye Djiba & Masih, Mansur, 2017. "Is inflation targeting the proper monetary policy regime in a dual banking system? new evidence from ARDL bounds test," MPRA Paper 79420, University Library of Munich, Germany.
    6. Paulo Soares Esteves, 2003. "Monetary Conditions Index for Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    7. Zulfiqar Hyder & Muhammad Mazhar Khan, 2007. "Monetary Conditions Index for Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 3, pages 165-190.
    8. Abdul Qayyum, 2002. "Monetary Conditions Index: A Composite Measure of Monetary Policy in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 551-566.
    9. Nijathaworn, Bandid & Chaikhor, Suwatchai & Chotika-arpa, Suppakorn & Sakkankosone, Suchart, 2015. "Monetary Policy and Foreign Exchange Management: Reforming Central Bank Functions in Myanmar," ADB Economics Working Paper Series 431, Asian Development Bank.
    10. Sentance, Andrew & Taylor, Mark P. & Wieladek, Tomasz, 2012. "How the UK economy weathered the financial storm," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 102-123.
    11. Christophe Blot & Grégory Levieuge, 2008. "Are MCIs Good Indicators of Economic Activity ? Evidence from the G7 Countries," Working Papers hal-00973056, HAL.
    12. Batini, Nicoletta & Nelson, Edward, 2000. "When the Bubble Bursts: Monetary Policy Rules and Foreign Exchange Market Behavior," Working Papers 2000-01, University of Sydney, School of Economics.
    13. Huang, Zhangkai, 2003. "Evidence of a bank lending channel in the UK," Journal of Banking & Finance, Elsevier, vol. 27(3), pages 491-510, March.
    14. Goodhart, Charles & Boris Hofmann, 2002. "Asset Prices and the Conduct of Monetary Policy," Royal Economic Society Annual Conference 2002 88, Royal Economic Society.
    15. Wai-Ching Poon, 2008. "Does Credit Channel Matter in the Conduct of Monetary Policy in Singapore?," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 40-50, August.

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