Global inflation: a laboured process

Bob Gilhooly, Gene Kindberg-Hanlon and Dan Wales.

The dramatic fall in the price of oil has had a marked effect on headline inflation across the world. In contrast, measures of core inflation (ex. food & energy) have been more stable suggesting, that once the base effects from oil drop out, headline rates of inflation should bounce back. However, while inflation rates around the world will mechanically pick up in the near-term, it is not clear that global labour markets are strong enough to drive inflation fully back to target.

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Bouncebackability of exports after the Great Trade Collapse of 2008/9

John Lewis and Selien De Schryder.

Did the dramatic fall in global trade exports in 2008/9 stem from a temporary shock, or did it herald a permanently lower level of trade?  The answer has important implications for the UK’s growth prospects.  If it was a permanent hit, then the UK’s weak export growth after the crisis is more explicable, but external growth sources have become less fruitful. We find that advanced economies as a whole exhibited a high degree of bouncebackability, since exports recovered to levels consistent with the pre-crisis relationship between output and exports.  But this masks considerable variability at the country level, with UK exports in particular recovering by less than expected.

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House Prices and Job Losses

Emma Lyonette and Gabor Pinter.

What explains the strong comovement between the housing market and the labour market in the UK? This blog summarises the findings of recent research by Pinter (2015) that emphasises the role of real estate as an important determinant of firms’ borrowing capacity. This is because real estate is widely used by corporates as collateral when trying to obtain external financing. Fluctuations in real estate prices may therefore cause fluctuations in firms’ borrowing capacity, which then affects firms’ decisions to undertake new investment, to create new jobs and to destroy existing jobs. The paper shows that this so-called collateral channel is important in understanding not only the recent Great Recession but historical UK business cycles in general.

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Fixing bankers’ pay: punish bad risk management, not bad risk outcomes

Misa Tanaka and John Thanassoulis.

Post-crisis, a number of jurisdictions have introduced remuneration regulations in order to reduce bankers’ incentives to take excessive risks.  The UK is pioneering the use of bonus clawbacks under which bankers are asked to pay back their bonuses if certain circumstances materialise at a future date.  In our latest paper, we show that clawback can encourage better incentives as long as bankers believe that they will be held liable for failures of risk management, and not simply for poor outcomes.  Having a transparent mechanism in place to apply clawbacks is therefore critical.  If bankers fear that clawback will be wielded too generally upon bad business outcomes, then it could end up making them excessively risk averse.

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Mean and modal Bank Rate expectations

Will Dison and David Elliott.

Financial market prices provide information about market participants’ Bank Rate expectations. But central expectations can be measured in different ways. Mean expectations, derived from forward interest rates, represent the average of the range of possible outcomes, weighted by their perceived probabilities. On the other hand, modal expectations, which can be estimated from interest rate options, represent the perceived single most likely outcome. Currently, these market-implied mean and modal expectations for the path of Bank Rate over the coming few years differ starkly, with the mode lying well below the mean. In this post we argue that this divergence primarily reflects the proximity of the effective lower bound to nominal interest rates.

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Finding a Match

Bradley Speigner.

Is falling unemployment masking a broader deterioration in UK labour market performance? The ease with which a typical job seeker lands a job is a crucial indicator of the health of the labour market, which cannot be fully inferred from just a casual glance at the headline unemployment rate. It is true that unemployment has declined quite rapidly recently. But this is because job openings have been unusually abundant while the labour market’s capacity to match individual workers to available jobs quickly has actually worsened. This capacity is referred to as matching efficiency, and it started falling in the UK even before the 2008 recession.

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