Monthly Archives: July 2016

Matchmaker, matchmaker make me a mortgage: What policymakers can learn from dating websites

Angelina Carvalho, Chiranjit Chakraborty and Georgia Latsi.

Policy makers have access to more and more detailed datasets. These can be joined together to give an unprecedentedly rich description of the economy. But the data are often noisy and individual entries are not uniquely identifiable. This leads to a trade-off: very strict matching criteria may result in a limited and biased sample; making them too loose risks inaccurate data. The problem gets worse when joining large datasets as the potential number of matches increases exponentially. Even with today’s astonishing computer power, we need efficient techniques. In this post we describe a bipartite matching algorithm on such big data to deal with these issues. Similar algorithms are often used in online dating, closely modelled as the stable marriage problem.

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Filed under Financial Stability, Macroeconomics, New Methodologies

Central bank digital currency: the end of monetary policy as we know it?

Marilyne Tolle.

Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?

Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.

I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.

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Filed under Banking, Currency, Monetary Policy

Stitching together the global financial safety net

Edd Denbee, Carsten Jung and Francesco Paternò.

The global financial safety net (GFSN) is a set of instruments and institutions which act as countries’ insurance for when capital flows suddenly stop or foreign currency markets suddenly freeze.  These resources were extremely important during the 2007-08 crisis when investors ran for the exits, threatening the external positions of many advanced and emerging economies.  Since then, the GFSN has expanded in size and nature, but was recently described by IMF Managing Director Christine Lagarde as “fragmented and asymmetric”.  We agree on the asymmetry – our recent paper finds that some countries have insufficient access to the GFSN.  However, we also find that the GFSN is sufficiently resourced for a severe set of shocks, provided the IMF’s current lending capacity is maintained.

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Filed under Financial Stability, International Economics

Is finance a powerful driver of growth?

Saleem Bahaj, Iren Levina and Jumana Saleheen.

Since the financial crisis the UK has experienced a period of weak productivity growth, weak investment coupled with a decline in credit to non-financial sectors of the economy.  But there is debate about the direction of causality: did low growth and other structural factors mean firms and households wanted to borrow less – as argued by Martin Wolf?  Or did the financial sector offer too few funds to the real economy in the wake of the crisis as banks tried to repair their balance sheets. Alternatively, the financial system may not be functioning properly in general, if much of the financial sector’s activity contributes little to the betterment of lives and efficiency of business – a point made by John Kay.

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Filed under Banking, Financial Markets, Macroeconomics, New Methodologies

The ballad of the landlord and the loan

Mariana Gimpelewicz and Tom Stratton.

Who is living in private rental properties, and why? The buy-to-let market has been headline news recently. Typically the story has been profit-hungry landlords squeezing out first-time buyers. But landlords are only half of the story. This post examines the rental market from the perspective of tenants. Our work suggests demand for private rental properties cannot explain all of the growth pre-crisis, but the case for over-exuberance is inconclusive. We think that factors driving tenant demand, including demographics, social housing and credit availability, accounts for around half of the growth in the Private Rental Sector (PRS) pre-crisis and over 80% post-crisis. The most important driver post-crisis has been tighter credit conditions, which generated demand for an additional 1 million PRS properties. Looking ahead, we project that tenant demand will drive the PRS to swell by up to an additional 1 million properties between 2014 and 2019.  If tenant demand were the only factor in play this would translate to annual growth in the number of buy-to-let mortgages of 2-7%.

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Filed under Financial Stability, Macroeconomics

No smog without fire: the financial stability risks around carbon-intensive investments

Rhiannon Sowerbutts.

An abrupt transition to a lower-carbon economy might cause disruption in financial markets as the value of energy companies is rapidly reassessed. Last year there was a sea change in attitudes as several funds divested their fossil fuel related assets, equity analysts and rating agencies began to issue warnings about carbon-intensive firms and the Paris Climate Change agreement was hailed as a breakthrough as it made the concept of a carbon budget that would limit future fossil fuel use mainstream. However, analysis of climate related ‘events’ suggests that although energy firms’ equity prices move in the expected direction this movement isn’t statistically significant. This doesn’t mean as global citizens we can relax, either about financial stability or for the future of the planet.

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Filed under Financial Markets, Financial Stability