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

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  • James Cloyne
  • Patrick Hürtgen

Abstract

This paper estimates the effects of monetary policy based on a new, extensive real-time dataset for the United Kingdom. Employing the Romer-Romer identification approach we construct a new measure of monetary policy innovations and find that a 1 percentage point increase in the policy rate reduces output by 0.6 percent and inflation by up to 1 percentage point after 2 to 3 years. Our use of forecast data is shown to be crucial and that their omission generates the well-known price puzzle. Our estimates are more comparable to the wider VAR literature but we also reconcile our findings with the Romer-Romer estimates for the United States.

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  • James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
  • Handle: RePEc:aea:aejmac:v:8:y:2016:i:4:p:75-102 Note: DOI: 10.1257/mac.20150093
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    Citations

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    Cited by:

    1. Paul Hubert & Becky Maule, 2016. "Policy and Macro Signals as Inputs to Inflation Expectation Formation," Sciences Po publications 2016-02, Sciences Po.
    2. David Aikman & Oliver Bush & Alan M. Taylor, 2016. "Monetary Versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report," NBER Working Papers 22380, National Bureau of Economic Research, Inc.
    3. Paolo Surico & Clodomiro Ferreira & James Cloyne, 2015. "Housing Debt and the Transmission of Monetary Policy," 2015 Meeting Papers 629, Society for Economic Dynamics.
    4. Silvia Miranda-Agrippino, 2015. "Unsurprising Shocks: Information, Premia, and the Monetary Transmission," Discussion Papers 1613, Centre for Macroeconomics (CFM), revised Apr 2016.
    5. Hetzel, Robert L., 2017. "What Remains of Milton Friedman's Monetarism?," Working Paper 17-9, Federal Reserve Bank of Richmond.
    6. repec:eee:eecrev:v:98:y:2017:i:c:p:410-423 is not listed on IDEAS
    7. Matthias Neuenkirch, 2016. "An Unconventional Approach to Evaluate the Bank of England's Asset Purchase Program," Research Papers in Economics 2016-11, University of Trier, Department of Economics.
    8. Silvia Miranda-Agrippino & Giovanni Ricco, 2015. "The Transmission of Monetary Policy Shocks," Discussion Papers 1711, Centre for Macroeconomics (CFM), revised Feb 2017.
    9. Holtemöller, Oliver & Brautzsch, Hans-Ulrich & Drechsel, Katja & Drygalla, Andrej & Giesen, Sebastian & Hennecke, Peter & Kiesel, Konstantin & Loose, Brigitte & Meier, Carsten-Patrick & Zeddies, Götz, 2015. "Ökonomische Wirksamkeit der Konjunktur stützenden finanzpolitischen Maßnahmen der Jahre 2008 und 2009. Forschungsvorhaben im Auftrag des Bundesministeriums der Finanzen," IWH Online 4/2015, Halle Institute for Economic Research (IWH).
    10. Cloyne, James & Ferreira, Clodomiro & Surico, Paolo, 2015. "Monetary Policy when Households have Debt: New Evidence on the Transmission Mechanism," CEPR Discussion Papers 11023, C.E.P.R. Discussion Papers.
    11. Hoffmann, Mathias & Hürtgen, Patrick, 2016. "Inflation expectations, disagreement, and monetary policy," Economics Letters, Elsevier, vol. 146(C), pages 59-63.
    12. Miranda-Agrippino, Silvia, 2016. "Unsurprising shocks: information, Premia, and the Monetary Transmission," LSE Research Online Documents on Economics 86234, London School of Economics and Political Science, LSE Library.
    13. Ambrogio Cesa-Bianchi & Gregory Thwaites & Alejandro Vicondoa, 2016. "Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom," Discussion Papers 1612, Centre for Macroeconomics (CFM), revised Aug 2016.
    14. Weale, Martin & Wieladek, Tomasz, 2016. "What are the macroeconomic effects of asset purchases?," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 81-93.
    15. Mumtaz, Haroon & Theophilopoulou, Angeliki, 2017. "The impact of monetary policy on inequality in the UK. An empirical analysis," European Economic Review, Elsevier, pages 410-423.
    16. David L. Reifschneider & Peter Tulip, 2017. "Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors : The Federal Reserve's Approach," Finance and Economics Discussion Series 2017-020, Board of Governors of the Federal Reserve System (U.S.).
    17. Forbes, Kristin & Kirkham, Lewis & Theodoridis, Konstantinos, 2017. "A trendy approach to UK inflation dynamics," Discussion Papers 49, Monetary Policy Committee Unit, Bank of England.
    18. Elena Gerko & Hélène Rey, 2017. "Monetary Policy in the Capitals of Capital," NBER Working Papers 23651, National Bureau of Economic Research, Inc.
    19. Falck, Elisabeth & Hoffmann, Mathias & Hürtgen, Patrick, 2017. "Disagreement and monetary policy," Discussion Papers 29/2017, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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