Matthew Osborne and Mathew Sim.
Are central bank reserves still ‘special’?
Historically, reserves have been “special” for several reasons: they are the ultimate means of settling payments between banks; they are the main medium through which central banks make monetary policy decisions “happen”; and crucially, central banks have a monopoly supply. Some of this specialness has now reduced, at least in the traditional sense. But, as this blog post goes on to explain, new liquidity standards suggest a new and important role for central bank reserves, which will create challenges as monetary policy is normalised. Finally, control over supply of reserves could also be a useful macroprudential policy tool.
Riccardo M Masolo and Francesca Monti.
Newspapers and other media outlets regularly speculate about what the Bank of England might do in response to current economic conditions. Curiously, however, most of the models we use to carry out our economic and policy analysis completely disregard this type of uncertainty. Many of them consider how people would behave when uncertain about the state of the economy, yet everyone is assumed to know for sure the variables that the central bank will respond to, how aggressively and why. To try and fill this gap between the models we typically use and the reality we actually face, in our paper we explore the effects of Knightian uncertainty about the behaviour of the policymaker in an otherwise standard macro model. Continue reading
The internet’s share of UK retail sales is – at 12% – the highest in the developed world. In my daily conversations with businesses and services, I find that some sectors are responding much more nimbly to the competition from internet retailers than others. In this blog I argue that the growing share of internet retailing is likely to reduce business investment, especially in buildings, but the additional capacity associated with internet retailing is likely to be a drag on retailers’ profitability that may last for many years. In my view the long-term effect on capital productivity should be positive, but the effects on labour productivity are less obvious and may be adverse.
Dan Georgescu & Manuel Sales.
Capital requirements for financial institutions are typically calculated using a statistical model and a risk measure such as VaR, whereas stress tests designed by regulators and risk managers are often based on subjective scenarios with no associated probability level. The stress test cannot therefore be easily linked to the capital measure. Taking insurance as an example, we show how to establish the link using intuitive tools which (i) respect the stress test designer’s intuition about causal direction, (ii) can be calibrated to pre-determined parameters such as correlations between risks, and (iii) can be easily communicated to and challenged by non-technical audiences.
Ask most young Britons about the housing market and they’ll undoubtedly have a personal anecdote to share. They may tell you about their struggle to get on the ladder, or how they’ve had to make ever larger concessions such as moving to the fringes of town. Or, they may tell you of their plans to take on a mammoth mortgage because the alternative—waiting a little longer—means that what is in reach now will likely be out of reach soon enough. This post empirically underpins what has been anecdotally obvious for some time: that the burden of debt is disproportionately falling on the young, and much more so than any other time in the last 20 years.
It’s easy to get lost in the extraordinarily large numbers used to describe complex, modern economies. Economic analysis is strewn with the words millions, billions and trillions, which sound deceptively similar and are all too easy to jumble up in a slip of the tongue or a slip of the pen. But size matters. In the 12 months from June 2014, the value of the Chinese stock market increased by more than the annual output of Japan, but over the next month fell by an amount equal to UK GDP.
Like Sooty, the BBC’s yellow bear loved by generations of British children, central banks should wave the ‘magic wand’ of data visualisation over their large, granular or complex data sets, in order to gain further insight into the patterns and relationships contained within them. This blog draws on some examples to highlight how different visualisation techniques help not only the communication of data, but more importantly, how it can aid data exploration, analysis and understanding.
Gino Cenedese, Richard Payne, Lucio Sarno and Giorgio Valente.
Various theories suggest that exchange rate fluctuations and stock returns are linked. We find little evidence of a relation between the two. Thus, a simple trading strategy that invests in countries with the highest expected equity returns and shorts those with the lowest generates substantial risk-adjusted returns. This strategy is akin to a carry trade strategy executed using stocks rather than money market instruments, but is uncorrelated with the conventional carry trade strategy. The returns can only be partly explained as compensation for risk.
A novel housing data set with information at the Local Authority level shows that changes in the proportion of high LTI mortgages was positively correlated with the size of the house price boom (1997-2007) and bust (2007-2009). Interestingly though, changes in the proportion of high LTV mortgages had the opposite relationship. This blog sets out some stylized facts on the wild swings in house prices over this period using this new data set.