Working Paper: NBER ID: w22380
Authors: David Aikman; Oliver Bush; Alan M. Taylor
Abstract: We have entered a world of conjoined monetary and macroprudential policies. But can they function smoothly in tandem, and with what effects? Since this policy cocktail has not been seen for decades, the empirical evidence is almost non-existent. We can only fix this shortcoming in a historical laboratory. The Radcliffe Report (1959), notoriously sceptical about the efficacy of monetary policy, embodied views which led the UK to a three-decade experiment of using credit policy tools alongside conventional changes in the central bank interest rate. These non-price tools are similar to policies now being considered or used by macroprudential policymakers. We describe these tools, document how they were used by the authorities, and craft a new, largely hand-collected data set to help estimate their effects. We develop a novel empirical strategy, which we term Factor-Augmented Local Projection (FALP), to investigate the subtly different impacts of both monetary and macroprudential policies. Monetary policy innovations acted on output and inflation broadly in line with consensus views today, but tighter credit policy acted primarily to modulate bank lending whilst reducing output and leaving inflation unchanged.
Keywords: monetary policy; macroprudential policy; credit controls; UK Radcliffe report
JEL Codes: E50; G18; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 1 standard deviation increase in the bank rate (E43) | significant decrease in bank lending (G21) |
| tighter credit controls (E51) | persistent decline in bank lending (G21) |
| tighter credit controls (E51) | decrease in manufacturing output (O14) |
| tighter credit controls (E51) | no significant impact on consumer prices (F69) |