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

49 Pages Posted: 5 Apr 2014

See all articles by James Cloyne

James Cloyne

Bank of England - Monetary Analysis; University of California, Davis

Patrick Hürtgen

Deutsche Bundesbank

Date Written: March 28, 2014


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.

Keywords: Monetary policy, narrative identification, real-time forecasts, business cycles

JEL Classification: E31, E32, E52, E58

Suggested Citation

Cloyne, James and Cloyne, James and Hürtgen, Patrick, The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom (March 28, 2014). Bank of England Working Paper No. 493, Available at SSRN: or

James Cloyne (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

Patrick Hürtgen

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

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