This study investigates whether or not UK industrial production is characterised by a
nonlinear response to monetary shocks. Our methodology is based on logistic smooth
transition vector autoregression modelling where we employ monthly data for the
period January 1960 to August 1999. We find evidence of small, though nonetheless
significant nonlinearities. Furthermore, we find support for a range of New
Keynesian arguments insofar as greater price flexibility, and therefore less real
adjustment, occurs against a background of high inflation. In addition, the potency of
monetary shocks can depend on the position of the UK economy in the business cycle.
This is Business Cycle Volatility and Economic Growth Research Paper No. 00/4.
This paper forms part of the ESRC funded project (Award No. L1382511013)
“Business Cycle Volatility and Economic Growth: A Comparative Time Series
Study”, which itself is part of the Understanding the Evolving Macroeconomy