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THE NARRATIVE APPROACH FOR THE IDENTIFICATION OF
MONETARY POLICY SHOCKS IN A SMALL OPEN ECONOMY

Eleni Angelopoulou
Bank of Greece,
Athens University of Economics and Business

ABSTRACT

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.

Correspondence:

Eleni Angelopoulou
Economic Research Department,
Bank of Greece, 21 E. Venizelos Ave.,
102 50 Athens, Greece
Tel.: +30 210 3203616
Fax.: +30 210 3202163
Email: eangelopoulou@bankofgreece.gr


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