Deflation Probability and the Scope for Monetary Loosening in the United Kingdom

28 Pages Posted: 7 Nov 2016

See all articles by Alex Haberis

Alex Haberis

Bank of England

Riccardo Masolo

Bank of England

Kate Reinold

Bank of England - Monetary Analysis

Date Written: November 4, 2016

Abstract

In this paper, we use an estimated DSGE model of the UK economy to investigate perceptions of the effectiveness of monetary policy since the onset of the 2007–08 financial crisis in a number of measures of deflation probability — the Survey of Economic Forecasts, financial-market option prices, and the Bank of England's Monetary Policy Committee’s (MPC) forecasts. To do so, we use stochastic simulations of the model to generate measures of deflation probability in which the effectiveness of monetary policy to offset deflationary shocks is affected by different assumptions about the existence and level of a lower bound on policy rates. We find that measures of deflation probability are consistent with the perception that the MPC was not particularly constrained in its ability to offset deflation shocks in the post-crisis period.

Keywords: deflation, forecasting and simulation, models and applications, interest rates, monetary policy

JEL Classification: E31, E37, E43, E47, E52

Suggested Citation

Haberis, Alex and Masolo, Riccardo and Reinold, Kate, Deflation Probability and the Scope for Monetary Loosening in the United Kingdom (November 4, 2016). Bank of England Working Paper No. 627, Available at SSRN: https://ssrn.com/abstract=2865588 or http://dx.doi.org/10.2139/ssrn.2865588

Alex Haberis (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Riccardo Masolo

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Kate Reinold

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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