Monthly Archives: November 2016

Bitesize: America is not always like the rest of the world

John Lewis.

Macroeconomists like to use US data to test and develop theories- the coverage is generally very good, and the world’s largest economy is an obvious benchmark.  But what if the US happens to be very atypical in some respects?  For example the evolution of the income distribution…

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Filed under Bitesize, Macroeconomics

Home is where your cash flows are? UK-focused equities and the international exposure of the FTSE All-Share

Lu Liu.

Equity prices reflect the market value of public companies, making them an important indicator of the economy.  In practice, stocks by firms listed on the local stock exchange serve as the ‘domestic’ equity benchmark but this might be misleading as an indicator of the national economy:  stock markets track the performance of individual firms, including their international business.  This makes it particularly challenging to extract a signal for the UK economy from UK equity prices, as the universe of UK-listed firms tends to be very global – for instance, around 2/3 of sales represented on the FTSE All-Share are generated abroad.  So for a better read of the UK economy, I’ll look at a subset of more UK-focused stocks and other more domestically-focused UK equity indices.

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Filed under Financial Markets, New Methodologies

Bitesize: The divergence of house prices and rents in Prime London

Philippe Bracke and Alice Pugh.

Economic theory suggests that property prices and rents should move together: rents represent the flow of housing services gained from living in a property, and prices are determined by the discounted value of all future rents.

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Filed under Macroeconomics

There are two productivity puzzles

Patrick Schneider.

Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.

In this post I discuss:

  1. what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;
  2. how I think of it as actually two puzzles: one in the level and the other in the growth rate; and
  3. why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.

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Bitesize: Has the FOMC increased its focus on foreign risks?

Dan Wales and Emil Iordanov.

Have FOMC discussions changed since the end of 2015? Are the committee more concerned about international risks now?

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Filed under Bitesize, International Economics, Macroeconomics, Monetary Policy

Macroprudential Regulation: Two birds with one stone?

Roy Zilberman and William Tayler.

bu-guest-post2Last year the Bank organised a research competition to coincide with the launch of the One Bank Research Agenda.  In this guest post, the authors of the winning paper in that competition, Roy Zilberman and William Tayler from Lancaster Business School, summarise their work on optimal macroprudential policy.

Can macroprudential regulation go beyond its remit of financial stability and also contain inflation and output fluctuations? We think it can and argue that macroprudential regulation, in the form of countercyclical bank capital requirements, is a superior instrument to both conventional and financially-augmented Taylor (1993) monetary policy rules. This is especially true in responding to financial shocks that drive output and inflation in opposite directions, as also observed at the start of the recent financial crisis (see Gilchrist, Schoenle, Sim and Zakrajsek (2016)). This helps to effectively shield the real economy without the need for a monetary policy interest rate intervention. Put differently, a well-designed simple and implementable bank capital rule can achieve optimal policy associated with zero welfare losses.

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Filed under Financial Stability, Guest Post, Macroeconomics, Macroprudential Regulation

Bitesize: Understanding housing activity in real time

Christopher Hackworth, Nicola Shadbolt and David Seaward.

While official housing market statistics are relatively timely and high frequency, they usually come with a lag of at least one month.  So indicators that lead official estimates are helpful for identifying turning points, or any ‘shocks’ to the economy.

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Filed under Banking, Bitesize, Macroeconomics, New Methodologies

When linear models are misleading

Jeremy Chiu and Sinem Hacioglu Hoke.

When shocks cause trouble

Small shocks can lead to big crises. At the heart of this issue is that economic dynamics might play out very differently against different backdrops: the same shock would have a very different effect if it hit the economy at the heights of the Great Recession than if it hit during more benign times. It might knock the economy into a more severe and persistent recession or financial stress if it hits already turbulent periods. It seems reasonable, therefore, that we would want to take into account the economic backdrop when we estimate our models.

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Filed under Financial Stability, Macroeconomics, New Methodologies

Bitesize: Sovereign debt, default and “r-g”

Mark Joy.

Government debt as a share of GDP is at its highest since WWII in advanced economies and since the 1980s debt crises in emerging markets, but so far, apart from Greece, Ukraine and some high-profile close calls in the euro area, this level of debt has caused barely a stir in financial markets. So is it okay to stop worrying?

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Filed under Financial Stability, International Economics, Macroeconomics