Monetary Versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report

David Aikman, Oliver Bush, Alan M. Taylor

NBER Working Paper No. 22380
Issued in June 2016, Revised in November 2018
NBER Program(s):Development of the American Economy, Monetary Economics

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.

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Document Object Identifier (DOI): 10.3386/w22380

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