Bank Rate Policy Under the Interwar Gold Standard: A Dynamic Probit Model

Abstract

In truth, the gold standard is already a barbarous relic. All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices, and employment, and are not likely, when the choice is forced upon us, deliberately to sacrifice these to the outworn dogma, which had value once, of k3. I 7s. iod. per ounce.' J. M. KEYNES (I923), p. I72 * An extended version of this paper is available from the Harvard Institute of Economic Research as Discussion Paper Number i oo8. An earlier version was presented at Yale, Brown and Stanford Universities, to the Harvard-MIT Joint Econometrics Seminar, to the Seminaire d'economie monetaire international (Paris), and to a meeting of the International Finance Section at Princeton University. We are grateful to seminar participants, to Peter Kenen, Charles Kindleberger and Peter Temin and to two referees of thisJouRNAL for comments. We acknowledge the permission of Her Majesty's Stationery Office to quote materials in the Public Record Office. Mark Watson thanks the National Science Foundation for financial support.

Likelihood-Based Estimation of Latent Generalized ARCH Structures

“…For instance, ordered probit models have been used by Eichengreen, Watson, and Grossman (1985) and Dueker (1999) to describe the interest rate setting behaviour of monetary policy authorities. In their models, the desired change in a target interest rate is given by an equation of the form…”

International Money and Finance

“…Eichengreen, Watson and Grossman (1985) find that the Bank of England did not play by the rules, as bank rate was keyed onto domestic business conditions. Hallwood, MacDonald and Marsh (1996) regress their time-series of pound-dollar realignment expectations on key macroeconomic variables -see table 2 -and find that they were sensitive to monetary policy.…”

Forecasting changes in UK interest rates

“…This paper assesses the predictive power of different information sets for the UK rate setting process using a dynamic probit model to capture the discrete nature of committee decisions (c.f. Eichengreen et al, 1985). Here we determine whether the information accurately predicts the next most likely change using monthly data.…”

“…Our preferred framework to explore the properties of this approach is therefore the dynamic probit model, originally proposed by Eichengreen et al (1985) and was subsequently modified and extended by Dueker (1999Dueker ( , 2000, which we use to investigate forecasts of the directional change of the base rate, denoted by ∆r t .…”

“…The maximum-likelihood estimation procedure proposed in Eichengreen et al (1985) is complicated due to numerical evaluation of the multiple integral in the likelihood function and the Markov switching property of the model. Dueker (1999Dueker ( , 2000 proposed a simpler method of estimating the parameters and their standard errors using a Bayesian method based Gibbs Sampling, which we also employ (details of the proceedure are reported in Casella and George,1992).…”