Fernando Eguren-Martin, Cian O’Neill, Andrej Sokol and Lukas von dem Berge
While planes were grounded, capital flew out of emerging market economies in response to the acceleration in the spread of the virus in the early stages of the Covid-19 pandemic. Was this capital flight predictable once you account for the sudden deterioration in the global financial environment? In this post we present a model that helps to think about how financial conditions and international capital flows are linked. We then apply this methodology to events observed between March and May 2020, and find that the model predicted a large increase in the likelihood of capital flight. However, the scale of outflows was abnormally large even once the sharp tightening in financial conditions is accounted for.
The SIR model, first developed by Kermack and McKendrick (1927), remains the canonical epidemiological model. It a natural choice for economists seeking to model the interplay between economic and epidemiological dynamics. This briefing surveys some of the many adaptations to the basic SIR setup which have emerged in the epi-macro literature over the past six months. These have all been used to analyse issues such as lockdown policies, super-spreaders, herd immunity, hospital capacity and ‘test- and-trace’.
On 16 June 1933, as the nationwide banking crisis was reaching a new peak, freshly elected US President Franklin D. Roosevelt put his signature at the bottom of a 37-page document: the Glass-Steagall Act. Eight decades later, the debate still rages on: should retail and investment banking be separated, as Glass-Steagall required? In a recent paper, we shed new light on the consequences of this type of regulation by examining the recent UK ‘ring-fencing’ legislation. We show that ring-fencing has an important impact on banking groups’ funding structures, and find that this incentivises banks to rebalance their activities towards retail mortgage lending and away from capital markets, with important knock-on effects for competition and risk-taking across the wider banking system.
The Covid shock has created substantial and unprecedented challenges for monetary policymakers. This post summarises the key literature on the immediate monetary policy response to the shock, including both tools and short to medium-term strategy issues (but leaving aside the longer-term question of fiscal-monetary interactions).
This post contributes to our occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.
In 1944, the Bank of England’s historian, John Clapham, looked back at the ways in which the Bank had changed since 1914 and remarked:
‘ . . . it would not be fantastic to argue that the Bank in 1944 was further . . . from 1914 than 1914 was from 1714.’
The Coronavirus pandemic and measures to contain contagion had far reaching consequences on economic activities, which also led to a sharp fall in CO2 emissions. This has sparked new debate about how the recovery from the crisis could be made compatible with the Paris climate goals. In this post, I survey the emerging literature on the link between the economic recovery from the aftermath of the pandemic and climate change.
Can Gao, Ian Martin, Arjun Mahalingam and Nicholas Vause
Since Covid-19-related crashes in March, major stock indices around the world have bounced back. This is despite little or no recovery in corporate earnings expectations. As a result, forward-looking price-to-earnings ratios have increased, rising above long-run average values in most large advanced economies and approaching record highs in the United States. Commenting on such valuations, some market participants have suggested there is ‘a great deal of optimism priced into the market’ and that stock prices ‘cannot defy economic gravity indefinitely’. This post takes a closer look at stock valuations, focusing on the UK, and drawing both on a textbook model and new research from academia.
Since the tumultuous events of 2007, much work has suggested that financial shocks are the main driver of economic fluctuations. In a recent paper, I propose a novel strategy to identify financial disturbances. I use the evolution of loan finance relative to bond finance to proxy for firms’ credit conditions and single out the shocks born in the financial sector. I apply and test the method for the US economy. I obtain three key results. First, financial shocks account for around a third of the US business cycle. Second, these shocks occur around precise events such as the Japanese crisis and the Great Recession. Third, the financial shocks I obtain are predictive of the corporate bond spread.
Arthur Turrell, Eleni Kalamara, Chris Redl, George Kapetanios and Sujit Kapadia
Every day, journalists collate information about the world and, with nimble keystrokes, re-express it succinctly as newspaper copy. Events about the macroeconomy are no exception. So could there be additional valuable information about the economy contained in the news? In a recent research paper, we ask whether newspaper stories could help to predict future macroeconomic developments. We find that news can be used to enhance statistical economic forecasts of growth, inflation and unemployment — but only by using supervised machine learning techniques. We also find that the biggest forecast improvements occur when it matters most — during stressed periods.