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

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. (JEL E23, E31, E32, E52)