Setting boundaries: finding thresholds in bank regulation

Zahid Amadxarif, Paula Gallego Marquez and Nic Garbarino

“We’ve done a lot to lower prudential barriers to entry into the banking sector […] but have we done enough to lower the equivalent barriers to growth?” asked PRA CEO Sam Woods in a recent speech. To make regulation proportionate, policymakers adapt regulatory requirements to the risks posed by each firm. But regulators face a trade-off between addressing systemic risks in a proportionate way and limiting regulatory complexity. New thresholds can create complexity and cliff-edge effects that can discourage healthy firms from growing. We identify regulatory thresholds for UK banks and building societies using textual analysis on a new dataset that contains the universe of prudential rules.

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Thinking historically

Austen Saunders

Central banks want to learn from history. They can do so by drawing on decades of work by economic historians, as well as their own archives which manifest layers of institutional memory. But the path from page to policy can be difficult to find. Central banks need therefore to invest in the capacity of their own staff to think historically. This will help them use evidence from the past to make better decisions in the future. In practice, this means producing historical research as well as consuming it. Institutions like central banks need to be fluent participants in the conversations which bridge the distance between past and present.

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Covid-19 briefing: post-lockdown macro

Michael Kumhof

In the wake of Covid-19 lockdown, macroeconomic policymakers have to deal not only with the immediate contraction in the economy, but also with the medium and longer term macro-consequences. Over the past four months, the macroeconomic literature on these topics has expanded rapidly. This post reviews the literature that considers the channels via which the shock affects the economy, and the macroeconomic policy options for dealing with the aftermath, taking as given the shock caused by the virus and the lockdown.

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Bitesize: Emerging market currency risk: evidence from the COVID-19 crisis

Simon Lloyd, Giancarlo Corsetti and Emile Marin

A striking regularity around global economic crises is that the dollar tends to appreciate sharply against emerging market (EM) currencies as capital flows out of EMs. In this respect, the adjustments observed since the onset of the COVID pandemic are no exception. Since the end of February, EM currencies have depreciated by around 15% (on average) and non-resident portfolio outflows from EMs summed to nearly $100 billion over a period of 45 days.

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The macro consequences of dollar shortages and central bank swap lines during the Covid-19 pandemic

Fernando Eguren Martin

Dollar shortages in funding markets outside the United States have been a recurrent feature of the last three major crises, including the turmoil associated with the ongoing Covid-19 pandemic. The Federal Reserve has responded by improving conditions and extending the reach of its network of central bank swap lines, with the aim of channelling US dollars to non-US financial systems. Despite the recurrence of this phenomena, little is known about the macroeconomic consequences of both dollar shortage shocks and central bank swap lines. In this post (and in an underlying Staff Working Paper) I provide some tentative answers. 

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Economic uncertainty before and during the COVID-19 pandemic

Dave Altig, Scott Baker, Jose Maria Barrero, Nick Bloom, Philip Bunn, Scarlet Chen, Steven J. Davis, Julia Leather, Brent Meyer, Emil Mihaylov, Paul Mizen, Nick Parker, Thomas Renault, Pawel Smietanka and Greg Thwaites.

The unprecedented scale and nature of the COVID-19 crisis has generated an extraordinary surge in economic uncertainty. In a recent paper we review what has happened to different indicators of uncertainty in the US and UK before and during the COVID-19 pandemic. Three results emerge. All of the indicators that we consider show huge jumps in uncertainty in reaction to the pandemic and its economic fallout. Most indicators reach their highest values on record, although the extent of the increases differ. The time paths also differ: implied stock market volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices partly recovered. In contrast, broader measures peaked later.

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Choosing from a varied toolkit: assessing China’s overall policy stance

Julian Reynolds, James Owen and Bob Gilhooly

This post examines how policy in China supported the Chinese economy prior to the Covid-19 pandemic, drawing on a newly developed toolkit. This topic is particularly important for China, where economic developments have a significant impact on the rest of the global economy, but where assessing the full spectrum of policy – monetary, regulatory and fiscal – is difficult. Policy levers in China have evolved alongside a rapidly changing economy, and there is still some uncertainty surrounding which levers are being pulled – and how hard – at any given point in time. This post attempts to paint a clearer picture of Chinese policy by assessing key policy levers and their effects on growth.

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Consumption in the time of a pandemic: tracking UK consumption in real time

Sinem Hacioglu Hoke, Diego Kaenzig and Paolo Surico

The response to the Covid-19 pandemic has included closure of retail outlets and social distancing. How large was the resulting consumption fall in the UK? In a new paper, we try to answer this question using a transaction-level dataset of over 8 million individual transactions. This gives a near-real time read on consumer spending, without the publication lags associated with national accounts consumption data. We find that the bulk of the fall had occurred before legally mandated lockdown started. The largest declines occurred in retail, restaurants and transport, but spending on some items such as online shopping, alcohol and tobacco rose. There is substantial variation in change in consumption across age, income group, housing tenure and local authority.

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Uncovering uncovered interest parity: exchange rates, yield curves and business cycles

Simon Lloyd and Emile Marin

The textbook uncovered interest parity (UIP) condition states that the expected change in the exchange rate between two countries over time should be equal to the interest rate differential at that horizon. While UIP appears to hold at longer horizons (around 5-10 years), it is regularly rejected at shorter ones (0-4 years). In a recent paper, we argue that interest rates at other maturities — captured in the slope of the yield curve — reflect information about the pricing of ‘business cycle risks’, which can help explain departures from UIP. A country with a relatively steep yield curve slope will tend to experience a depreciation in excess of the UIP benchmark, at business cycle frequencies especially.

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Global real rates, 1311–2018

Paul Schmelzing

Paul Schmelzing is an academic visitor to the Bank of England, currently based at Yale University. In this guest post, he summarises his research on the differential between real interest rates and real growth rates over the past seven centuries…

There is a lively academic and policy debate about whether a build-up of excess savings in advanced economies has created a drag on long-term interest rates. In a recent paper, I provide new context to these discussions. I construct a long-run advanced economy (DM) public real interest rate series geographically covering 78% of DM GDP since the 14th century. Using this series, I argue that current interest rate trends cannot be rationalized in a “secular stagnation” framework that has been “manifest for two decades”. Rather, historical data illustrates that advanced economy real rates have steadily declined for more than five centuries, despite important reversal periods. This post draws from long-run economic history to provide additional insights concerning the current interest rate environment.

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