A limited participation model of the monetary transmission mechanism in the United Kingdom

In this paper, a model of the UK economy is developed in which monetary growth determines inflation, but in which multiple shocks obscure the relationship between money and inflation. The model is a Dynamic Stochastic General Equilibrium model in which consumers can only participate in financial markets before shocks are observed; in other words, has the feature of 'limited participation'. The particular version of the model used in the paper is similar to other models of this class but with the additional features of costs of adjusting the capital stock. The model is able to capture important features of the monetary transmission mechanism in the United Kingdom, as embodied in the responses of variables to monetary policy shocks.