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Monetary policy transmission in the United Kingdom: A high frequency identification approach

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  • Cesa-Bianchi, Ambrogio
  • Thwaites, Gregory
  • Vicondoa, Alejandro

Abstract

This paper investigates the impact of monetary policy shocks on macroeconomic and financial variables in the United Kingdom using a new series of high-frequency monetary policy surprises. Employing our surprises as an instrument in a monthly SVAR over the UK’s inflation-targeting period, we show that a monetary policy tightening induces a decline in economic activity and in CPI, an appreciation of the Pound, a reduction in bank credit, and a significant increase in mortgage and corporate bond spreads. UK monetary policy also affects foreign credit spreads, consistent with the extensive presence of large international players in the UK financial intermediation sector. We finally propose a novel test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks constructed by Cloyne and Hurtgen (2016), and find that our high-frequency monetary policy surprises are not significantly affected by non-monetary news.

Suggested Citation

  • Cesa-Bianchi, Ambrogio & Thwaites, Gregory & Vicondoa, Alejandro, 2020. "Monetary policy transmission in the United Kingdom: A high frequency identification approach," European Economic Review, Elsevier, vol. 123(C).
  • Handle: RePEc:eee:eecrev:v:123:y:2020:i:c:s0014292120300076
    DOI: 10.1016/j.euroecorev.2020.103375
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    More about this item

    Keywords

    Monetary policy transmission; External instrument; High-frequency identification; Structural VAR;
    All these keywords.

    JEL classification:

    • 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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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