Monetary policy spillovers in the first age of financial globalisation: a narrative VAR approach 1884–1913

This paper investigates whether movements in the Bank of England’s interest rate hindered the development of the United States by transmitting or amplifying crises during the first age of financial globalisation. Evidence that US monetary and financial developments entered into the Bank’s reaction function implies that a Bank Rate series must include some endogenous rate changes. In order to clean Bank Rate of such movements the narrative approach is applied to a previously unexploited source in the Bank’s archives, ‘The Record of Outstanding Events’. The Bank also followed a known rule of adjusting Bank Rate to preserve its reserves to liabilities ratio. Bank Rate is also cleaned of the contemporaneous impact of this ratio in order to control for any reflex policy movements that could have been anticipated. This ensures that only true monetary policy shocks to the United States are identified. Estimates derived from this new measure indicate that although the Bank was able, via abrupt rate rises, to attract gold to the United Kingdom and replenish its reserves ratio, it was not responsible for causing or aggravating US crises. This result runs counter to conventional wisdom in the literature and contradicts the hypothesis that many US financial crises extended directly back to Threadneedle Street.