Is the response of the bank of England to exchange rate movements frequency-dependent? |
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| Institution: | 1. Institute for Economic Forecasting, Romanian Academy, Bucharest University of Economic Studies, Calea 13 Septembrie no. 13, Casa Academiei, Bucharest, Romania;2. Department of Economics Pretoria 0002, University of Pretoria, South Africa;1. Department of Business Administration, Frederick University, 7, Y. Frederickou Str., Nicosia 1036, Cyprus;2. Department of Economics, University of Piraeus, Greece;1. Federal Reserve Bank of Atlanta, United States;2. Georgia State University, Georgia, United States;3. Levy Economics Institute of Bard College, United States;1. The Conference Board and Georgetown University Center for Business and Public Policy, USA;2. Imperial College Business School, CEP, CEPR and IZA, England;3. ISTAT and LUISS Lab of European Economics, Rome |
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| Abstract: | In this paper, we estimate a Small Open Economy Dynamic Stochastic General Equilibrium (SOEDSGE) model of the United Kingdom (UK), with the main focus being to test the hypothesis whether the Bank of England (BoE) responds to (frequency-dependent) exchange rate movements or not. For our purpose, we use an extended quarterly data set spanning the period of 1986:Q2 to 2018:Q1, which in turn includes the zero lower bound situation, and also estimate the SOEDSGE model based on observable data decomposed into its frequency components. We find that the BoE not only responds to exchange rate movements in a statistically significant manner, but also that it primarily focuses on long-term movements of currency depreciations more strongly than short-term fluctuations of the same. In general, our results are also confirmed for three other developed inflation-targeters namely, Australia, Canada and New Zealand. |
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