Monetary policy transmission in an open economy: new data and evidence from the United Kingdom

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 02 September 2016

Working Paper No. 615
By Ambrogio Cesa-Bianchi, Gregory Thwaites and Alejandro Vicondoa

This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any endogenous response to macroeconomic variables.

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