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<p>This paper explores how Brexit altered the Bank of England’s monetary policy effects and the shape of the yield curve, focusing on economic uncertainty and market-driven factors. We expect uncertainty from Brexit to lower the impact of monetary policy on the economy, while external market factors, such as Brent oil prices and exchange rates, gain influence over the yield curve after 2016. Unlike Nelson-Siegel models that focused on yield curve fitting (Diebold et al., J Econometrics 131:309–338, 2006), using a factor-augmented vector autoregression (FAVAR) model with a broad range of economic and financial variables from 2000 to 2019, we compare pre- and post-Brexit periods. Results show Brent oil and exchange rates have stronger ties to FAVAR factors post-Brexit (Tables <InternalRef RefID="Tab8">8</InternalRef> and <InternalRef RefID="Tab9">9</InternalRef>) and help explain the yield curve’s level, slope, and curvature (Table&#xa0;<InternalRef RefID="Tab4">4</InternalRef>). These external market factors matter alongside standard macroeconomic factors like GDP or inflation. The findings suggest policymakers at the Bank of England and investors need to weigh these external factors when setting policies or building portfolios.</p>

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Monetary policy transmission and the yield curve: the role of external market factors against the backdrop of Brexit

  • 期刊论文

  • 发表日期：

    2026年1月4日

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  • Christos Tzomakas

摘要

This paper explores how Brexit altered the Bank of England’s monetary policy effects and the shape of the yield curve, focusing on economic uncertainty and market-driven factors. We expect uncertainty from Brexit to lower the impact of monetary policy on the economy, while external market factors, such as Brent oil prices and exchange rates, gain influence over the yield curve after 2016. Unlike Nelson-Siegel models that focused on yield curve fitting (Diebold et al., J Econometrics 131:309–338, 2006), using a factor-augmented vector autoregression (FAVAR) model with a broad range of economic and financial variables from 2000 to 2019, we compare pre- and post-Brexit periods. Results show Brent oil and exchange rates have stronger ties to FAVAR factors post-Brexit (Tables 8 and 9) and help explain the yield curve’s level, slope, and curvature (Table 4). These external market factors matter alongside standard macroeconomic factors like GDP or inflation. The findings suggest policymakers at the Bank of England and investors need to weigh these external factors when setting policies or building portfolios.