James Cloyne, Patrick Hürtgen, Thursday, May 15, 2014

The effects of interest-rate changes on output and inflation could be much larger than previously thought. Such evidence was suggested by Romer and Romer in their analysis of the US. This column provides similar estimates for the UK based on a novel real-time dataset. In response to a 1% increase in the interest rate, output declines by 0.6% and inflation falls by one percentage point after two to three years.