Global R*

Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi

Recent increases in interest rates around the world, following a multi-decade decline, have intensified the debate on their long-run prospects. Are previous trends reversing or will rates revert to low values as current shocks subside? Answering this question requires assessing the underlying forces driving secular interest-rate trends. In a recent paper, we study the long-run drivers of the global trend interest rate – ‘Global R*’ – in the 70 years up to the pandemic. Global R* fell by more than three percentage points from its peak in the mid-1970s, driven by falling productivity growth and increased longevity. Our results suggest that without a reversal in these trends, or new forces emerging to offset them, long-run Global R* is likely to remain low.

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Supply chain disruptions: shocks, links, and hidden exposure

Rebecca Freeman, Richard Baldwin and Angelos Theodorakopoulos

Supply chain disruptions are routinely blamed for things ranging from elevated inflation to shortages of medical equipment in the pandemic. But how should exposure to foreign supply chains be measured? Using a global input-output database, this post shows that the full exposure of US manufacturing to foreign suppliers (especially China) is much larger than face value measures indicate. Moreover, it argues that the big change in supply chain disruptions in recent years stems from changes in the nature of the shocks (from idiosyncratic to systemic), not the nature of the supply chains.

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Why lower house prices could lead to higher mortgage rates

Fergus Cumming and Danny Walker

Bank Rate has risen by more than 5 percentage points in the UK over the past couple of years. This has led to much higher mortgage rates for many people. In this post we analyse another potential source of pressure on mortgagors: the potential for falls in house prices to push borrowers into higher – and therefore more expensive – loan to value (LTV) bands. In a scenario where house prices fall by 10% and high LTV spreads rise by 100 basis points, we estimate that an additional 350,000 mortgagors could be pushed above an LTV of 75%, which could increase their annual repayments by an extra £2,000 on average. This could have a material impact on the economy.

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Profits in a time of inflation: what do company accounts say in the UK and euro area?

Gabija Zemaityte and Danny Walker

Inflation has been high in many countries since 2021. Some have said that companies have increased their profits over that period: so-called ‘greedflation’. We use published company accounts for thousands of large listed companies to look for signs of increased profits in the data. Consistent with previous analysis of aggregate incomes, price indices and business surveys, we find no evidence of a rise in overall profits in the UK – prices have gone up alongside wages, salaries and other input costs. Companies in the euro area are in a similar position. However, companies in the oil, gas and mining sectors have bucked the trend, and there is lots of variation within sectors too – some companies have been much more profitable than others.

Recent analysis by Sophie Piton, Ivan Yotzov and Ed Manuel has shown that corporate profits have been relatively stable in the UK and that profits are unlikely to have been a big contributor to inflation. Others have suggested that the trend in the euro area has been somewhat different. In this post we use a novel data source to look at this question: the information companies have reported in their accounts.

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Beyond emissions: the interplay of macroprudential regulation and climate policy

Francesca Diluiso, Barbara Annicchiarico and Marco Carli

While climate change is often seen as a long-term concern, climate mitigation policies can have different short-term effects, since they affect the transmission mechanism of conventional macroeconomic shocks. In a new working paper, we show that cap-and-trade schemes lead to lower volatility in GDP and financial variables, and result in reduced welfare costs of the business cycle, when compared to the more widely known carbon taxes. As we find that these welfare differences are primarily driven by distortions in financial markets, we argue that countercyclical macroprudential regulation, even without any green-biased component, can effectively align the welfare performance of these policies and mitigate their short-run costs.

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The granular origins of exchange-rate fluctuations

Simon Lloyd, Daniel Ostry and Balduin Bippus

How much capital flows move exchange rates is a central question in international macroeconomics. A major challenge to addressing it has been the difficulty identifying exogenous cross-border flows, since flows and exchange rates can evolve simultaneously with factors like risk sentiment. In this post, we summarise a staff working paper that resolves this impasse using bank-level data capturing the external positions of UK-based global intermediaries to construct novel ‘Granular Instrumental Variables‘ (GIVs). Using these GIVs, we find that banks’ United States dollar (USD) demand is inelastic – a 1% increase in net-dollar assets appreciates the dollar by 2% against sterling – state dependent – effects double when banks’ capital ratios are one standard deviation below average – and that banks are a ‘marginal investor’ in the dollar-sterling market.

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Bias, fairness, and other ethical dimensions in artificial intelligence

Kathleen Blake

Artificial intelligence (AI) is an increasingly important feature of the financial system with firms expecting the use of AI and machine learning to increase by 3.5 times over the next three years. The impact of bias, fairness, and other ethical considerations are principally associated with conduct and consumer protection. But as set out in DP5/22, AI may create or amplify financial stability and monetary stability risks. I argue that biased data or unethical algorithms could exacerbate financial stability risks, as well as conduct risks.

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Unifying monetary and macroprudential policy

Julia Giese, Michael McLeay, David Aikman and Sujit Kapadia

Central banks have been using a range of monetary policy and macroprudential tools to maintain monetary and financial stability. But when should monetary versus macroprudential tools be used and how should they be combined? Our recent paper develops a macroeconomic model to answer these questions. We find that two instruments are better than one. Used alone, interest rates can control inflation, but are ineffective for financial stability. Policymakers can do better by also deploying the countercyclical capital buffer, a tool that varies the amount of additional capital banks must set aside. The appropriate combination of tools can vary: both should tighten to counter a joint expansion of credit and activity, but move in opposite directions during an exuberance-driven credit boom.

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Can data science capture key insights in news articles?

Itua Etiobhio, Riyad Khan and Steve Blaxland

The volume of information available to supervisors from public sources has grown enormously over the past few years, including unstructured text data from traditional news outlets, news aggregators, and social media. This presents an opportunity to leverage the power of data science techniques to gain valuable insights. By utilising sophisticated analytical tools, can supervisors identify hidden patterns, detect emerging events and gauge public sentiment to better understand risks to the safety and soundness of banks and insurance firms? This article explores how data science could support central bank supervisors to discover significant events, capture public trends and ultimately enable more effective supervision.

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Has the import price shock been worse in the UK or euro area?

Josh Martin and Julian Reynolds

How much have higher import prices increased consumer prices in the UK and euro area? This post explores this question using a framework grounded in some fundamental economic and national accounting concepts. Starting with the GDP price, we adjust for relative import and export prices to arrive at a consumer prices measure – this gives us a sense of the impact of import prices and the terms of trade shock on consumer price inflation. For the euro area, aggregating imports across member countries, which includes trade between members, risks overstating total imports and thus the effect on inflation. Using supplementary data to resolve this issue, we find that the euro area terms of trade shock has been larger than the UK’s.

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