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
Date Written: August 14, 2015
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: Suggested Citation