Monthly Archives: June 2015

Banks are not intermediaries of loanable funds – and why this matters

Zoltan Jakab & Michael Kumhof

Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, standard macroeconomic models were initially not ready to provide much support in thinking about the role of banks. This has now changed, with many new papers that study the interaction of banks with the macroeconomy. However, as emphasized by Adrian, Colla and Shin (2013), there are many unresolved issues. In our new paper “Banks Are Not Intermediaries of Loanable Funds – And Why This Matters” (Jakab and Kumhof (2015)), we argue that many of them can be traced to the fact that virtually all of the newly developed models are based on the intermediation of loanable funds (ILF) theory of banking. Continue reading

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Filed under Banking, Financial Stability, Macroeconomics, Macroprudential Regulation

Oil is not as it seems: Expectations of future oil supply key to explaining drop in price

Gene Kindberg-Hanlon & Menno Middeldorp 

The sharp fall in the oil price in late 2014 was mostly due to supply rather than demand, with expectations of future supply more important than shifts in current production. We can conclude this by comparing a model using economic data with another using asset prices that capture expectations of future oil supply. Our supply side explanation implies the fall in the oil price is mostly good news for the UK and other oil importers, rather than mainly a signal of a weaker global economy.

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Filed under Financial Markets, International Economics, Macroeconomics, Monetary Policy

Skills matter: The changing workforce and the effects on pay and productivity

Matthew Corder

Pay and productivity growth over the past couple of years have remained weak despite a rapid fall in unemployment and robust GDP growth.  But these aggregate measures in the UK reflect the sum of a diverse range of individuals in the workforce.  Changes in the mix of that workforce, therefore, can affect pay and productivity growth.  Based on analysis of the determinants of individual workers’ wages, I estimate that changes in the mix of the workforce may account for about 1pp of the recent weakness in annual average pay growth relative to normal. Continue reading

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Filed under Macroeconomics, Monetary Policy

BoE archives reveal little known lesson from the 1974 failure of Herstatt Bank

Ben Norman

In June of 1974, a small German bank, Herstatt Bank, failed. While the bank itself was not large, its failure became synonymous with fx settlement risk, and its lessons served as the impetus for work over the subsequent three decades to implement real-time settlement systems now used the world over. Documents from the Bank of England’s Archive shed light on a lesser known aspect of Herstatt’s failure – the chain reaction it caused across financial centres as banks in different countries delayed settling their payments to each other. The lesson for policymakers today to grapple with is: when a bank fails, could we still expect surviving banks to delay making payments, with a potential chain reaction in the payment system?

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Filed under Banking, Economic History, Financial Stability, Market Infrastructure, Resolution

Driverless Cars: Insurers Cannot be Asleep at the Wheel

Neha Jain, James O’Reilly & Nicholas Silk

In 2020 Google plans to launch a self-driving car which has already driven nearly one million miles without causing an accident; it doesn’t get tired and irritable, swerve into lamp posts or require a driving test. The in-built chauffeur comes in the form of a rotating LIDAR laser taking 1.3 million recordings per second, and it’s a better driver than you. By eliminating the element of human blunders, driverless cars are forecast to reduce motor accidents by up to 90% in the US according to McKinsey. That might imply a substantial impact on the insurance industry, with liability potentially shifting to car manufacturers. Such developments would pose challenging questions for the PRA in regulating UK insurance firms.

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Filed under Financial Stability, Insurance, Microprudential Regulation

How does the scope for policy loosening affect the risk of deflation?

Alex Haberis, Riccardo M Masolo & Kate Reinold

Inflation is currently very low in the UK (indeed briefly dipping into negative territory in April), naturally raising speculation about whether we will experience persistent deflation in coming years. This post illustrates that the probability of deflation is raised further, and the likely duration of any deflation increased, if one thinks that there are limits on how far the Monetary Policy Committee (MPC) could loosen policy in the face of new shocks. We also explore how the current situation differs from other episodes since the crisis when the risk of deflation has been similarly elevated.

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Filed under Macroeconomics, Monetary Policy

The Bank of England enters the blogosphere…

Bank Underground is a new blog written by staff at the Bank of England. Our goal is to bring more of our thinking into the public domain and to showcase our analytical and research output. We hope to contribute to the wider debate on areas that are relevant to the Bank’s work.

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