DP11353 Monetary Versus Macroprudential Policies: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report
|Author(s):||David Aikman, Oliver Bush, Alan M. Taylor|
|Publication Date:||June 2016|
|Keyword(s):||credit controls, macroprudential policy, Monetary policy|
|JEL(s):||E50, G18, N14|
|Programme Areas:||Financial Economics, Economic History, Monetary Economics and Fluctuations|
|Link to this Page:||www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11353|
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 skeptical about the efficacy of monetary policy, embodied views which led the UK to a three-decade experiment of using credit controls 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 dataset to help estimate their effects. We develop a novel identification strategy, which we term Factor-Augmented Local Projection (FALP), to investigate the subtly different impacts of both monetary and macroprudential policies. Monetary policy acted on output and inflation broadly in line with consensus views today, but credit controls had markedly different effects and acted primarily to modulate bank lending.