THE NARRATIVE APPROACH FOR THE IDENTIFICATION OF
MONETARY POLICY SHOCKS IN A SMALL OPEN ECONOMY
Bank of Greece,
Athens University of Economics and Business
This paper reviews 22 years of UK monetary policy in the pre-inflation targeting period (1971-1992) using official record from the Bank of England Quarterly Bulletin. A transparent definition of policy episodes is used. The empirical analysis shows that output displays the usual hump-shaped response after a shock to the policy indicator. All variables display theory-consistent behaviour. Monetary policy and exchange rate volatility are found to cause substantial output fluctuation in a four year horizon. The “narrative model” extended to a small open economy compares well with a structural VAR.
Keywords: monetary policy shocks, narrative approach, UK.
JEL classification: E52, E58
Acknowledgements: The author would like to thank Heather Gibson for her valuable comments. The views expressed in this paper do not necessarily reflect those of the Bank of Greece.
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece
Tel.: +30 210 3203616
Fax.: +30 210 3202163