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The Industrial Impact of Monetary Policy Shocks: Some Stylised Facts

  • Joe Ganley
  • Chris Salmon

This paper investigates the disaggregated effects of monetary policy shocks on the output of 24 sectors of the UK economy. The paper's principal aim is to provide stylised facts about the sectoral responses to unexpected changes in monetary policy and to help assess how monetary policy developments feed through the economy. It also provides indirect evidence about the underlying nature of the transmission mechanism. The first set of results relates to the largest industrial sectors - construction, services, production industries (including utilities and manufacturing) - which sum together to form the output measure of GDP. Thereafter the paper focuses on the manufacturing sector alone. Data sources for manufacturing are richer than for other sectors of the economy, which allows a more detailed analysis of the factors that might account for the pattern of responses to monetary shocks which we observe across manufacturing. Focusing first on the main industrial sectors, the paper finds that the effects of an unanticipated monetary policy tightening seem to be unevenly distributed across sectors of the economy. As might be expected, sectors such as construction show a sizeable and rapid decline in output, whereas others, like services, show a much more muted reaction. Manufacturing as a whole also responds quite sharply to a monetary tightening, but some large industrial sectors, notably the utilities, show a subdued reaction. Turning finally to the manufacturing sector alone, the paper shows that the (2 digit SIC) sectors that comprise manufacturing also exhibit diverse responses to a monetary shock. The paper shows the pattern of manufacturing sector responses seems correlated with the size characteristics of the firms in each sector. In particular, sectors which mainly comprise "small" firms tend to exhibit a stronger reaction to monetary shocks than sectors that mainly comprise "larger" firms. This might indicate that credit market imperfections play a role in the monetary policy transmission process.

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Paper provided by Bank of England in its series Bank of England working papers with number 68.

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Date of creation: Sep 1997
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Handle: RePEc:boe:boeewp:68
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  1. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  2. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  5. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
  6. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
  8. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  9. Pain, Nigel & Westaway, Peter, 1996. "The Demand for Domestic Output and Imports in the U.K.: A Dynamic Systems Approach," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(1), pages 1-21, March.
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