Monthly Archives: November 2015

Hedging the zero bound with threshold-based forward guidance

Richard Harrison, Lena Boneva and Matt Waldron.

Following the Great Recession, many central banks cut their policy rates towards their lower bounds and turned to unconventional policy measures in a bid to revive their economies.   That was accompanied by an increasing use of `forward guidance’ about the future path of the policy rate.  In this post we summarise results from our ongoing research on `Threshold-Based Forward Guidance’, whereby the policymaker links their decision to raise the policy rate from the lower bound to outturns for particular macroeconomic variables.   We show that TBFG can improve welfare at the lower bound by increasing expected future inflation and, unlike forward guidance based purely on calendar time, by shrinking the variance of possible outcomes for inflation around the target.

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Filed under Macroeconomics, Monetary Policy

What can we discover from average mortgage rate stats?

Hannah Phaup.

What’s the point of an ‘average’ mortgage rate, and why does it matter to the Bank of England?  Mortgage rates often hit the news with headline-grabbing low rates, or rate increases for certain mortgage products.  An average mortgage rate strips away the extremes, and as I will outline can represent both what is available to the average borrower, and what is experienced.

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Filed under Banking, Financial Stability

How did the Bank’s forecasts perform before, during and after the crisis?

Nicholas Fawcett, Riccardo Masolo, Lena Koerber, Matt Waldron.

Introduction: forecasting and policy-making

Forecasting is difficult, especially when it concerns the future.  If we needed a reminder, the 2008-09 financial crisis demonstrated that macroeconomic forecasts can be highly inaccurate when the economy is buffeted by large shocks (see, for example, Figure 1).  But that is not a good reason to avoid forecasting: monetary policy takes time to work, so forecasts are indispensable in monetary policymaking.  Instead, we need to understand how different models behave in the eye of the storm: do some cope better during breaks and crises than others?  And can we make better forecasts by using information that is not normally included in economic models?

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Filed under Macroeconomics, Monetary Policy

Regulatory arbitrage in action: evidence from cross-border lending and macroprudential policy

Dennis Reinhardt and Rhiannon Sowerbutts.

We find evidence that certain types of macroprudential regulation are avoided by borrowing from abroad. Borrowing by the non-bank sector from abroad increases after an increase in capital requirement, but not after an increase in lending standards. This is likely to be because of the way that the two regulations are applied and is supportive of strong frameworks for reciprocating capital regulation.

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Filed under Banking, Financial Stability, International Economics, Macroprudential Regulation, Resolution

Productivity in the UK vs the US – can we play catch up again?

Marko Melolinna.

Productivity growth in the UK has been puzzlingly weak in recent years. By contrast, US productivity growth has been relatively robust at higher levels. There is a macroeconomic literature, however, that suggests that countries with lower levels of productivity should grow more quickly than high productivity countries. I argue that there is evidence of the UK catching up with the US in the past, but this relationship appears to have broken down after the financial crisis. If the past relationship between US and UK productivity returns, the prospects for UK productivity could be bright. But this improvement is likely to take time and will depend on fundamental drivers of productivity, like investment, R&D spending and educational attainment.

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Filed under Macroeconomics

The “question” or the “answer”? Market reaction to UK stress tests

Matthieu Chavaz, Jeremy Chiu and Evarist Stoja.

How might banks fare in stressful macroeconomic conditions? Are they strong enough to withstand the stress and survive or will they fall like dominoes? Stress tests offer insights into such questions.

Regulators are not only making a growing usage of such tests, they are also increasingly inclined to communicate openly about them. This is a remarkable evolution. Throughout history, regulators have typically followed some form of Hippocratic Oath and refrained from disclosing their detailed diagnostics of individual banks’ health. Regulators are now increasingly keen to release both the “answer” to stress tests (the results) and the “question” – the stress scenario regulators confront banks with. This column suggests that the disclosure of the scenario can be as important as – if not more than – the disclosure of the results.

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Filed under Financial Markets, Financial Stability, Macroprudential Regulation, Microprudential Regulation

High-frequency trading and market quality: What’s the deal?

Evangelos Benos.

It’s been a while now since high-frequency-trading (HFT) made its debut in the financial market landscape. Initially, little was known about it and regulators and market participants alike were naturally concerned about its potential impact on markets. Nevertheless, over the past few years we have learned quite a bit more about HFT. So what’s the deal with HFT? This short blog post briefly describes the evolution of HFT, summarizes the current understanding of the impact of HFT on market quality and highlights some aspects of HFT activity that are still contentious. Regardless, I believe, the inescapable conclusion that so far emerges is that HFT has mostly had a positive impact on market functioning.

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Filed under Financial Markets, Market Infrastructure