Authors: Renzo Corrias and Tobias Neumann.
When banks are subject to both a leverage and a risk-weighted constraint they may violate a fundamental law of economics: that of demand. In our theoretical model, some banks constrained by the leverage ratio react to an increase in capital requirements by investing more in the asset. This so-called ‘Giffen’ behaviour is very counterintuitive. One would assume the opposite to be the case: higher capital requirements should discourage lending. In our theoretical model, Giffen behaviour is likely to occur for firms that hold predominantly low-risk weighted asset and are therefore bound by the leverage ratio. The real-world equivalent in the context of mortgages would be building societies and, in the future, ring-fenced banks.
Authors: Lukasz Rachel and Thomas Smith.
In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates. We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital. Together we think these secular trends can account for 300bps of the historic decline in the global real rate. Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%. Continue reading
Authors: Lukasz Rachel and Thomas Smith.
Long-term real interest rates have fallen substantially over the past thirty years. The co-movement in real rates across both advanced and emerging economies suggests a common driver is at work – the global neutral rate may have fallen. In this two-part blog post we attempt to identify which secular trends could have driven such a fall. In Part 1 we highlight how weaker expectations for global trend growth can account for around 100bps of the 450bps fall in real rates since the 1980s. But this effect seems to mainly apply to the post-crisis period – suggesting other factors are responsible for the protracted decline before the crisis.
Katie Farrant and Magda Rutkowska
UK private non-financial corporations (PNFCs) consistently ran a financial surplus between 2002 and 2013. They now hold around £1.8 trillion of financial assets, including £0.5 trillion of cash. This has attracted attention from policymakers and the media. Should we expect companies to spend these assets to finance investment? The MPC considers this to be possible (see e.g. the February 2015 Inflation Report). Many agree, calling on companies to spend their ‘cash hoards’ (see e.g. these articles in the Telegraph and the FT). Here, we explain why we think companies are unlikely to run down their assets significantly. This does not mean that they will not invest; rather, they will not necessarily finance investment through liquidating assets.
In many countries the great recession that followed the financial crisis led to sharp rises in not only the rate, but also the duration of unemployment. These were bad in themselves, but many were further worried that because lengthy unemployment spells are thought to erode workers’ human capital, productive potential would be damaged. The question I ask is whether this should affect the conduct of monetary policy. The short answer is no. But it may still be a question worth exploring further.
Buy-to-Let (BTL) investors are taking on an increasingly relevant role in the UK housing market. In this post, I present some initial findings from my ongoing research on BTL. I use data from the England and Wales Land Registry and the Zoopla web portal to find properties that are advertised for rent shortly after being bought. I show that: 1) BTL investors prefer (a) London and (b) flats; 2) BTL investors are more likely to pay cash; 3) BTL transactions are faster; 4) BTL investors buy at a discount; and 5) BTL discounts are larger for (a) Northern regions and (b) big properties.
Good analysis requires new discoveries, creativity, even luck. But innovation is not just a matter of chance — it favours those who are ready for it, which in this case means having the right data. Utilising micro-data to answer new and different questions is a good start, but the next step is to link such item-level information from various sources together. That way we can create analytical opportunities beyond the sum of the parts. In this post I show how a unique linked dataset on the UK housing market reveals that buy-to-let buyers secure a greater discount from the asking price than other buyers.
Nick Butt, Rohan Churm & Michael McMahon
When faced by a slowing economy and contracting credit what policy should be used? There is a body of evidence to suggest that QE is an effective means to boosting asset prices, aggregate demand and inflation, but it’s far less clear whether it improves the flow of credit to the economy. In theory, increases in deposit funding caused by such purchases might lead banks to increase lending. In this post we explore how this might occur. But we find no evidence that this happened in the UK. This may reflect the fact that QE worked instead through a so called ‘portfolio rebalancing channel’ and that the resulting churn in banks’ deposit funding stopped any such channel from operating. Continue reading
Ambrogio Cesa-Bianchi and Alessandro Rebucci
In some parts of the emerging world, housing markets have grown well ahead of income in recent years. Will a US monetary policy normalisation bring about a correction in house prices as the search for yield unwinds and capital flows back to the US? Looking at the past through the prism of a structural VAR, we think the answer is “yes it will”. Shocks to global liquidity have much larger effects on house prices in emerging markets than in advanced world economies. A tightening in global liquidity conditions also leads to a rapid capital account reversal, exchange rate depreciation and hence a sharp fall in consumption.
How do central banks achieve nominal stability? In a new working paper, I show that in a version of the textbook New Keynesian model with incomplete information, beyond establishing the steady-state inflation rate a central bank doesn’t need to do anything for prices (and not just the rate of inflation) to remain determinate and stationary. The paper is available via the Staff Working Paper No.532 or my research page (a non-technical summary is here). It’s still a work in progress and any feedback is welcome, so please feel free to contact me.