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

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 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.JEL codes: E50, G18, N14.

Do enlarged fiscal deficits cause inflation? The historical record

“…Empirical estimates and forecasts of the British growth rate in the 1960s and 1970s by the National Institute of Economic and Social Research (NIESR) justified this ‘Going for Growth Strategy’. Estimates of potential annual growth rates of 4 per cent in the 1960s and 6 per cent were way above the historical trend growth rate of 2.5 per cent (Aikman, Bush, & Taylor, 2018, p. 24; Nelson & Nikolov, 2001, p. 33). A final important rationale for expansionary fiscal policy was to improve the living standards of workers.…”

Bayesian Inference of Local Projections with Roughness Penalty Priors

“…This study addresses one of the two disadvantages of local projections, compared with the standard statistical framework that includes VAR, namely, that of less statistical efficiency. The other disadvantage that the exogenous variable is identified ex ante can be resolved by a twostage regression approach, as in Aikman et al (2016). Constructing a Bayesian counterpart to this line of approach has not been studied.…”

Karl Brunner and U.K. Monetary Debate

“…Consequently, the Report had remarked negatively on the value of such controls (Committee on the Working of the Monetary System, 1959, p. 134, paragraph 394). Nevertheless, in the wake of the Radcliffe Report U.K. policy moves went in the direction of maintaining and extending direct controls on credit (Batini and Nelson, 2005, p. 55;Aikman, Bush, and Taylor, 2016). Brunner (1969a, p. 502) complained of the credit-control measures taken by the U.K. authorities during the 1960s that they had regarded as restrictive: "Many times [,] however, the actions actually performed have no effect on the money supply and aggregate demand.…”