Market Beliefs About the UK Monetary Policy Lift-Off Horizon: A No-Arbitrage Shadow Rate Term Structure Model Approach

37 Pages Posted: 16 Aug 2015

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Andrew Meldrum

Board of Governors of the Federal Reserve System

Date Written: August 14, 2015

Abstract

We use a no-arbitrage shadow rate term structure model to estimate investors’ views about the timing of monetary policy ‘lift-off’ in the United Kingdom over time. Our estimates show that when the UK policy rate was first cut to 0.5%, in March 2009, investors believed that it would remain at the lower bound only for a short period, with an estimated probability of 70% that the policy rate would rise above 0.75% within twelve months. The estimated median horizon for policy rate lift-off rose sharply in 2012 but fell back to thirteen months by the end of our sample period, in May 2014.

Keywords: Shadow rate models, sequential regression estimation, policy lift-off, zero lower bound.

JEL Classification: C10, C50, G12

Suggested Citation

Andreasen, Martin M. and Meldrum, Andrew, Market Beliefs About the UK Monetary Policy Lift-Off Horizon: A No-Arbitrage Shadow Rate Term Structure Model Approach (August 14, 2015). Bank of England Working Paper No. 541, Available at SSRN: https://ssrn.com/abstract=2644309 or http://dx.doi.org/10.2139/ssrn.2644309

Martin M. Andreasen (Contact Author)

Aarhus University ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Andrew Meldrum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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