The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper estimates the effects of monetary policy on the UK economy based on a new, extensive real-time forecast data set. Employing the Romer-Romer identification approach we first construct a new measure of monetary policy innovations for the UK economy. We find that a one percentage point increase in the policy rate reduces output by up to 0.6 per cent and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the UK and we show that forecasts are crucial for this result. Finally, we show that the response of policy after the initial innovation is crucial for interpreting estimates of the effect of monetary policy. We can then reconcile differences across empirical specifications, with the wider VAR literature and between our UK results and the larger narrative estimates for the US. Terms of use: Documents in EconStor mayJEL: E31, E32, E52, E58.

A Trendy Approach to UK Inflation Dynamics

“…17 Data for breakevens at shorter maturity are unfortunately not available for all periods. 18 This variable was also used in Cloyne and Hürtgen (2016) in an analysis of UK monetary policy shocks. 19 Following the New Keynesian literature, we also experimented with the change in the labour share, but this lacked empirical significance in all of the specifications we estimated.…”

Effects of Quasi-Random Monetary Experiments

“…By conditioning on central bank forecasts available at the time of the policy decision, researchers devised another measure of plausibly random surprises to policy-see Romer and Romer (2004), and the subsequent literature such as Cloyne and Hürtgen (2016) or Coibion et al (2017). Again, measurement of the policy surprise hinges on the assumption that the policymaker does not rely on additional variables for which the staff may not have prepared a forecast.…”

“…First, using the subpopulation of open pegs, we find evidence of considerable attenuation bias in policy responses when we estimate the responses to monetary policy using traditional OLS selection-on-observables identification versus identification with instrumental variables. Second, we investigate the robustness of our new IV estimates of LATE for open pegs as compared to the LATE found by investigating the combined behavior of post-WW2 data from the U.S. and U.K. using the established instrumental variables approaches of Romer and Romer (2004) and Cloyne and Hürtgen (2016). In the latter, instruments are based on staff forecasts available at the time policy was set.…”

Monetary versus Macroprudential Policies Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report

“…of Cloyne and Hürtgen (2014), who find that NIESR forecasts are highly correlated with the Bank of England's Inflation Report projections for the period in which both are available.…”