Sustainable Approach to the Normalization Process of the UK’s Monetary Policy

Abstract

It has been more than a decade since central banks, in the face of the global financial crisis, implemented a set of unconventional initiatives that included a rapid and significant decrease in their main interest rates and an unprecedented balance sheet policy. Thus far, they still have not returned their monetary policy to the pre-crisis framework and have not implemented a normalization process. Currently, a trend of using econometric models in monetary policy for forecasting purposes has been observed. Among these models, Bayesian vector autoregression models (BVAR models) are increasingly being used by central banks. The main aim of this study was to conduct an empirical verification of the BVAR model’s usage for short-term prediction which could then be used for a sustainable (ordered) normalization process for the UK’s monetary policy. This study verifies a research hypothesis which states that the BVAR model might be a useful tool in the Bank of England’s decision-making process regarding the normalization of its monetary policy. Additionally, the cause and effect analysis, observation method, document analysis method, and synthesis method were also considered. The conducted research indicates that a large BVAR model has a significant predictive value for short-term forecasting.