Optimal choice of monetary policy instruments in the U.K

• Main Author: Arestis, P.
• Published: University of Surrey 1976
• Subjects: 333
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.448060

'The purpose of this study is to examine which instrument or set of instruments of monetary policy is optimal in the case of the U. K. economy. A model of the U. K. economy is developed that includes both the. 'real' sector and the 'monetary' sector. The emphasis is on the correct specification and estimation of the structural equations; we, thus, estimate this model with the help of three econometric techniques: ordinary least squares, two-stage least squares, and full information maximum likelihood. The stability of the parameters of the estimated relationships is tested, and also the stability of these relationships for prediction. Forecasts for a post sample period of one quarter is obtained practically in all cases, as well as forecasts of twelve quarters in one case. These forecasts are based on actual rather than forecasted values of the exogenous or predetermined variables. The dynamic aspects of the model are carefully examined, and dynamic multipliers are derived. It is on these dynamic multipliers that our conclusions on the question of optimal monetary policy in the U. K. are based. This analysis suggests that an interest rate policy aiming at controlling the treasury bill rate, and through this rate the long-term bond rate, is the optimal policy; however, the money stock has a role to play too. The latter can be manipulated in such a way to help the monetary authorities to achieve the target interest rate. Finally, some light is thrown on the question as to whether the setting of the instruments of monetary policy by the authorities is affected by the rest of the economic system. Clearly, if the answer to this question is positive then what is required is join estimation of the relationships that explain the setting of. the instruments with the rest of the basic model. Our conclusion is that we find no strong. - reasons for joint estimation. This analysis focuses also on the supply side of these assets, a problem that has been neglected by the literature on the monetary problems of the U. K. economy as well as elsewhere.