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The macroeconomic effects of monetary policy: a new measure for the United Kingdom

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  • Cloyne, James

    (Bank of England)

  • Hürtgen, Patrick

    ()
    (Department of Economics, University of Bonn)

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 1 percentage point increase in the policy rate reduces output by up to 0.6% and inflation by up to 1.0 percentage point after two to three years. Our approach resolves the price puzzle for the United Kingdom 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 vector autoregression literature and between our United Kingdom results and the larger narrative estimates for the United States.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 493.

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Length: 49 pages
Date of creation: 28 Mar 2014
Date of revision:
Handle: RePEc:boe:boeewp:0493

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Keywords: monetary policy; narrative identification; real-time forecasts; business cycles;

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  1. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  3. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  4. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  5. Molodtsova, Tanya & Nikolsko-Rzhevskyy, Alex & Papell, David H., 2008. "Taylor rules with real-time data: A tale of two countries and one exchange rate," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S63-S79, October.
  6. Olivier Coibion, 2012. "Are the Effects of Monetary Policy Shocks Big or Small?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 1-32, April.
  7. Ben S. Bernanke & Kenneth N. Kuttner, 2003. "What explains the stock market's reaction to Federal Reserve policy?," Staff Reports 174, Federal Reserve Bank of New York.
  8. Dedola, Luca & Lippi, Francesco, 2000. "The Monetary Transmission Mechanism: Evidence from the Industries of Five OECD Countries," CEPR Discussion Papers 2508, C.E.P.R. Discussion Papers.
  9. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  10. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
  11. Efrem Castelnuovo & Paolo Surico, 2009. "Monetary Policy, Inflation Expectations and the Price Puzzle," "Marco Fanno" Working Papers 0101, Dipartimento di Scienze Economiche "Marco Fanno".
  12. Faust, Jon & Swanson, Eric T. & Wright, Jonathan H., 2004. "Identifying VARS based on high frequency futures data," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1107-1131, September.
  13. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  14. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  15. James Cloyne, 2013. "Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom," American Economic Review, American Economic Association, vol. 103(4), pages 1507-28, June.
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