This article investigates the determinants of UK interest rates using a factor-augmented vector autoregression model, similar to the one suggested by Bernanke, Boivin and Eliasz (NBER, wp. 10220 (2004)). The published Minutes of the Bank of England Monetary Policy Committee (MPC) are used to identify the variables included in a large UK data set for predicting UK interest rates up to 20-months ahead.The results for this modelling strategy are very good with the out-of-sample performance of the factor-augmented VAR being strongly superior to that of simple VAR and AR models. Results appear to be robust to changes in the number of factors, lags and sample period.
Lagana', G. (2004). Measuring Monetary Policy in the UK: A FAVAR approach. In Money Macro and Finance Research Group annual conference, London - September 2004 (this item is included in nep-mac and nep-mon Date: 2004-09-17) http://repec.org/mmfc04/64.pdf (pp.1). 1 : 1.