The transmission of UK monetary policy across national borders: Investigation of the impact on oil prices

Does UK monetary policy affect world oil prices? Long term low interest rates and expansionary monetary policy enhanced by consequences of financial crisis are blamed for increases in oil prices. Therefore this paper explores the links between monetary policy changes and the volatility of oil prices. The aim is to identify the inventory and supply channels of transmission mechanism between UK monetary policy and oil market by estimating a SVAR model. Focusing primarily on UK monetary policy this paper contributes to an up-to-date evaluation of the effect of UK monetary policy shocks on oil prices at national, international and global level. Results show that UK monetary policy has statistically significant impact on oil prices through inventory channel at national and international level but small effect at global level. Although, surprisingly loose UK monetary policy has significant impact on OPEC oil supply rather than European oil supply. The contribution of the expansionary policy effect is sizeable and comparable with the effect of larger economies. Considering that the UK economy is set for a slow recovery with prognosis of low interest rates for the next years, particular attention must be paid to the transmission of monetary policy across national borders.