Deflation probability and the scope for monetary loosening in the United Kingdom

We use an estimated DSGE model of the U.K. economy to investigate perceptions of the scope for monetary loosening since the 2007-08 financial crisis. We simulate our model under alternative assumptions about the constraints on monetary policy and compare the implied deflation probabilities with those expected by professional forecasters, financial markets (from options prices), and policymakers. We find that these real-time, external estimates of deflation probability are consistent with policy not having been perceived to have been constrained since the crisis.