Balancing bias and variance in the design of behavioral studies: The importance of careful measurement in randomized experiments

Andrew Gelman.
bu-guest-post2

The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”.  In this guest post, one of the keynote speakers at the event, Andrew Gelman professor of statistics and political science at Columbia University, points out some of the pitfalls of randomly assigned experiments with control groups.

When studying the effects of interventions on individual behavior, the experimental research template is typically:  Gather a bunch of people who are willing to participate in an experiment, randomly divide them into two groups, assign one treatment to group A and the other to group B, then measure the outcomes.  If you want to increase precision, do a pre-test measurement on everyone and use that as a control variable in your regression.  But in this post I argue for an alternative approach- study individual subjects using repeated measures of performance, with each one serving as their own control.

Continue reading

Leave a comment

Filed under Guest Post, New Methodologies

It’s time to bring more realistic models of human behaviour into economic policy and regulation

David Halpern.

bu-guest-post2The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”.  In this guest post, one of the keynote speakers at the event, David Halpern, CEO of the Behavioural Insights Team, argues that insights from behaviour science can improve the design and effectiveness of economic policy interventions.

Behaviour science has had major impacts on policy in recent years. Introducing a more realistic model of human behaviour – to replace the ‘rational’ utility-maximizer – has enabled policymakers to boost savings; increase tax payments; encourage healthier choices; reduce energy consumption; boost educational attendance; reduce crime; and increase charitable giving. But there remain important areas where its potential has yet to be realised, including macroeconomic policy and large areas of regulatory practice. Businesses, consumers, and even regulators are subject to similar systematic biases to other humans. These include overconfidence; being overly influenced by what others are doing; and being influenced by irrelevant information. The good news is that behavioural science offers the prospect of helping regulators address some of their most pressing issues. This includes: anticipating and addressing ‘animal spirits’ that drive bubbles or sentiment-driven slowdowns; reducing corrupt market practices; and encouraging financial products that are comprehensible to humans.

Continue reading

Leave a comment

Filed under New Methodologies

Mind the steps: competition implications of graduated approach to setting capital surcharges

Paolo Siciliani, Nic Garbarino, Thomas Papavranoussis and Jonathan Stalmann.

Systemically important banks are material providers of critical economic functions.  The Global Financial Crisis showed how distress or failure of one of these firms may have a severe impact on the financial system and the real economy.  Systemic capital surcharges protect the economy from these negative spillovers by decreasing systemically important firms’ probability of distress or failure.   A graduated approach facilitates effective competition to the extent that the capital surcharges faced by firms are more proportionate to the scale of systemic risks that they pose. This post illustrates some of the competition implications with respect to the methodology used to set the number and level of thresholds.

Continue reading

Leave a comment

Filed under Banking, Financial Stability, Macroprudential Regulation, Microprudential Regulation

Forming strong bonds: dynamics in corporate bond markets

Karen Braun-Munzinger, Zijun Liu and Arthur Turrell.

If a boat is unstable and someone jumps out, does it capsize the boat for everyone else? In a novel application of agent-based modelling, we examine how investors redeeming the corporate bonds held for them by open-ended mutual funds can cause feedback loops in which bond prices fall further, posing risks to financial stability. In our model, reducing the speed with which investors pull out their investments over time helps to keep prices stable and remaining investors’ savings on an even keel.

Continue reading

Leave a comment

Filed under Financial Markets, Financial Stability, Macroprudential Regulation

Should the true costs of insuring deposits of up to £75,000 be made clearer?

Andrew Hewitt.

Deposit insurance schemes guard against bank runs by reducing or removing individual depositors’ incentives to withdraw their funds if they believe their bank to be in trouble. They help protect depositors but they risk also protecting risky bank business models by removing depositors’ incentives to avoid riskier banks. What can be done about this? In the past the answer was sometimes to make small depositors bear part of the risk through “co-insurance”. This was proven not to be credible. In this blog I consider some of the options available, including the risk-based levies currently being introduced in the EU and elsewhere, and increased transparency, drawing on recent literature on the saliency of tax in consumer choices.

Continue reading

6 Comments

Filed under Banking, Financial Stability, Microprudential Regulation, Resolution

Transmitting liquidity shocks across borders: evidence from UK banks

Robert Hills, John Hooley, Yevgeniya Korniyenko and Tomasz Wieladek.

When funding conditions became much more difficult in the recent financial crisis, how did UK banks react?  Did they adjust their domestic and external lending to different degrees?  Did foreign-owned banks behave differently from UK-owned banks, and did it make a difference whether they were a branch or a subsidiary?  Did the other features of their balance sheet make a material difference to their lending behaviour?  Our research suggests that the answer to all of these questions is “yes”.

Continue reading

Comments Off on Transmitting liquidity shocks across borders: evidence from UK banks

Filed under Banking, Financial Stability, International Economics

Car finance – is the industry speeding?

Alex Golledge, Tim Pike & Phil Eckersley.

The car industry’s fortunes play an important part in the stability of the broader economy. The automotive industry (including manufacturers, their suppliers, dealers, servicing, leasing and refuelling) accounts for over 4% of GDP. Demand for new cars is particularly sensitive to the economic cycle, typically falling sharply in recessions but growing strongly in recoveries (Chart 1). So it was not surprising that the Government introduced a car scrappage scheme between April 2009 and March 2010 to stimulate private new car demand following the recession. This article examines a fairly recent development in the industry, namely that new car purchases nowadays are mostly financed by manufacturers’ own finance houses. This has a risk of exacerbating the cyclicality of new car sales shown in the chart. Moreover, manufacturers increasingly bear the risk of future falls in car prices, potentially making the industry even more vulnerable to macroeconomic shocks.

Continue reading

1 Comment

Filed under Financial Stability, Macroeconomics

Matchmaker, matchmaker make me a mortgage: What policymakers can learn from dating websites

Angelina Carvalho, Chiranjit Chakraborty and Georgia Latsi.

Policy makers have access to more and more detailed datasets. These can be joined together to give an unprecedentedly rich description of the economy. But the data are often noisy and individual entries are not uniquely identifiable. This leads to a trade-off: very strict matching criteria may result in a limited and biased sample; making them too loose risks inaccurate data. The problem gets worse when joining large datasets as the potential number of matches increases exponentially. Even with today’s astonishing computer power, we need efficient techniques. In this post we describe a bipartite matching algorithm on such big data to deal with these issues. Similar algorithms are often used in online dating, closely modelled as the stable marriage problem.

Continue reading

Comments Off on Matchmaker, matchmaker make me a mortgage: What policymakers can learn from dating websites

Filed under Financial Stability, Macroeconomics, New Methodologies

Central bank digital currency: the end of monetary policy as we know it?

Marilyne Tolle.

Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?

Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.

I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.

Continue reading

12 Comments

Filed under Banking, Currency, Monetary Policy

Stitching together the global financial safety net

Edd Denbee, Carsten Jung and Francesco Paternò.

The global financial safety net (GFSN) is a set of instruments and institutions which act as countries’ insurance for when capital flows suddenly stop or foreign currency markets suddenly freeze.  These resources were extremely important during the 2007-08 crisis when investors ran for the exits, threatening the external positions of many advanced and emerging economies.  Since then, the GFSN has expanded in size and nature, but was recently described by IMF Managing Director Christine Lagarde as “fragmented and asymmetric”.  We agree on the asymmetry – our recent paper finds that some countries have insufficient access to the GFSN.  However, we also find that the GFSN is sufficiently resourced for a severe set of shocks, provided the IMF’s current lending capacity is maintained.

Continue reading

1 Comment

Filed under Financial Stability, International Economics