Money market operations and volatility of UK money market rates

In this paper, the question of whether in the United Kingdom the choice of the operational framework for monetary policy has been systematically related to patterns in money market rates is examined. Attention is first focused on the Bank of England's policy target, the two-week repo rate. The tests indicate that tighter spreads between the two-week market rate and the official repo rate result in lower money market volatility at the very short end of the money market curve. The effects at the longer end are much weaker. But no evidence of transmission of two-week volatility along the money market curve is found. In contrast to many other central banks, the Bank of England does not employ an operating target for the overnight rate. No evidence is found that allowing greater variation in overnight rates undermines efforts of the central bank to keep other money market rates in alignment with the rate at which it operates when implementing its monetary policy. The results further indicate that volatility of rates at the very short end of the UK money market yield curve has declined significantly since the early 1990s. The introduction of the gilt repo market in January 1996 was associated with lower money market volatility, although there is evidence that volatility had started to fall as early as mid-1995. The effects of the 1997 reforms of the Bank of England's open market operations are less discernible in the data. In contrast, the creation of a ceiling for overnight rates in June 1998 was more clearly associated with a reduction in volatility of end-of-day overnight rates.

Money market operations and short-term interest rate volatility in the United Kingdom

This study examines whether in the United Kingdom the choice of the operational framework for monetary policy has been systematically related to patterns in money market rates. It first focuses on the Bank of England's policy target, the two-week repo rate. The tests indicate that tighter spreads between the two-week market rate and the official repo rate result in lower money market volatility at the very short end of the money market curve. The effects at the longer end are much weaker. But no evidence is found of transmission of two-week volatility along the money market curve. In contrast to many other central banks, the Bank of England does not employ an operating target for the overnight rate. No evidence is found that allowing greater variation in overnight rates undermines efforts of the central bank to keep market interest rates in alignment with its monetary policy target. The results further indicate that volatility of rates at the very short end of the UK money market yield curve has declined significantly since the early 1990s. The introduction of the gilt repo market in January 1996 was associated with lower money market volatility, although there is evidence that volatility had started to fall as early as mid-1995. The effects of the 1997 reforms of the Bank of England's open market operations are less discernible in the data. In contrast, the creation of a ceiling for overnight rates in June 1998 was more clearly associated with a reduction in volatility of end-of-day overnight rates.

The role of corporate balance sheets and bank lending policies in a financial accelerator framework

In this paper the popular Bernanke, Gertler and Gilchrist (BGG) model is used to explore links between the financial health of the non-financial corporate sector and bank lending behaviour on the one hand, and the effectiveness of monetary policy on the other. The model's microeconomic contracting framework is used to generate specific financial scenarios, defined in terms of steady-state credit spreads, bank lending policies and corporate sector financial health. These scenarios are embedded in the macroeconomic BGG model, and an investigation carried out into how they affect dynamic responses of the real economy to monetary and real shocks. The simulations show that in the context of the BGG model, the balance sheet positions of the financial and non-financial corporate sectors can affect the monetary transmission mechanism. It is illustrated that in certain financial scenarios in the model the financial accelerator mechanism is very potent, whereas in others it has little incremental impact. This implies that, for a given shock, monetary policy can be less or more proactive, respectively. In addition, the model simulation results suggest that certain parameters may merit particular attention. For example, the sensitivity of bank lending policy to news about corporate financial health has an especially marked impact in the model's dynamics. And as illustrated in previous work, corporate leverage also plays an important role in amplifying and propagating shocks.

Long-horizon equity return predictability: some new evidence for the United Kingdom

This paper revisits the issue of long-horizon equity return predictability for the United Kingdom in the context of the dynamic dividend discount model of Campbell and Shiller. This model attributes predictable variation in equity prices to predictable variation in expected returns. The model is supported by the theoretical asset pricing literature, which shows how the variation in expected returns can be related to investors' time-varying preferences for risk. The paper considers various empirical specifications that are consistent with the Campbell and Shiller model and finds that they are supported by UK equity data. In particular, there is weak evidence that the dividend yield has predictive ability for long-horizon excess returns. The paper also examines some of the econometric issues brought up by recent research, in particular the small-sample bias, and applies appropriate statistical corrections. It further shows that the model's predictive ability depends greatly on the sample period over which the model is estimated.

Money market operations and volatility of UK money market rates

Includes bibliographical references. Also available via the InternetAvailable from British Library Document Supply Centre- DSC:9350. 8308(no 174) / BLDSC - British Library Document Supply CentreSIGLEGBUnited Kingdo