Leaning into the Wind : A Structural VAR Investigation of UK Monetary Policy

We investigate the effects of UK monetary policy from 1974-2001 using a structural vector autoregression with quarterly data. We adapt Uhlig's (2001) sign restriction identification methodology and show that shocks which can reasonably be described as monetary policy shocks have played a very small role in the total variation of both UK monetary and macroeconomic variables. Most of the variation in UK monetary variables has been due to their 'systematic' reaction to other macroeconomic shocks. In particular we show that UK interest rate policy has systematically 'leant into the wind' in that interest rates have been raised in response to both unexpected rises in prices and employment. In this paper therefore we identify not only UK monetary policy shocks but also other structural macroeconomic shocks which are interesting in their own right. In particular we find that the effects of a price level shock resemble a supply shock in the AS/AD framework and are persistent whereas the effects of a business cycle shock resemble a demand shock in many respects and are transient