Monthly Archives: January 2017

How should regulators deal with uncertainty? Insights from the Precautionary Principle

Ian Webb, David Baumslag and Rupert Read.

One September morning, the Lord Mayor of London was called to inspect a fire that had recently started in the City. Believing that it posed little threat, he refused to permit the demolition of nearby houses, probably due to the expense of compensating the owners. The fire spread and ultimately destroyed most of the city. The Great Fire of London had begun. Only when the fire became too extensive to be readily halted did the full extent of the danger become evident. Financial regulators today face a similar challenge preventing financial crises- action causes significant costs to some but the consequences of inaction are much more uncertain. To combat this, we argue they should apply the precautionary principle.

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Filed under Financial Stability, Macroprudential Regulation

The tip of the iceberg: the implications of climate change on financial markets

Yuliya Baranova, Carsten Jung and Joseph Noss.

There has been a recent increase in awareness of investors that limiting emissions to prevent climate change might leave a substantial proportion of the world’s carbon reserves unusable, and that this could lead to revaluations across a range of financial assets. If risks are left unaddressed, this could result in large losses for some investors. But is this adjustment in financial market prices likely to be abrupt?  And – even if it is – is it likely to pose risks to financial stability?  We argue that the answer to both these questions could be yes:  financial valuations can move sharply even if the transition to sustainable energy were smooth.  And exposures are sufficiently large to warrant attention from both investors and policymakers.

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Filed under Financial Markets, Financial Stability, International Economics

History dependence in the housing market

Philippe Bracke and Silvana Tenreyro.

When someone bought a house turns out to be an important factor in predicting whether the house will be sold again soon, and at what price. People who bought during a boom aim at achieving higher prices when they sell and, as a consequence, move less often. We explore whether this pattern is due to psychological anchoring (whereby the previous purchase price becomes an important reference point) or to the way the mortgage market works (for example, with homebuyers often using proceeds from house sales for down-payments on new properties).

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Filed under Macroeconomics, Macroprudential Regulation

Bitesize: Exploring UK sectoral productivity

Ian Billett and Patrick Schneider.

As time goes to infinity, the probability that a productivity analyst will wonder ‘which sectors are driving these trends?’ goes to one. We present an interactive sectoral productivity tool to help you explore this question without any fuss.

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Filed under Bitesize, Macroeconomics, New Methodologies

Bitesize: More on the bond-equity correlation

Matt Roberts-Sklar.

In a previous post I showed that bond and equity returns are negatively correlated, having been positively correlated for most of the 18th-20th centuries. The time series was long (three centuries) and the chart was just for the UK, prompting two very reasonable questions: 1) does your story hold for countries other than the UK? and 2) what’s happened to this correlation recently?

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Filed under Bitesize, Financial Markets

Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals

Paul Schmelzing, Harvard University.

bu-guest-post2Paul Schmelzing is a visiting scholar at the Bank from Harvard University, where he concentrates on 20th century financial history. In this guest post, he looks at the current bond market through the lens of nearly 800 years of economic history.

The economist Eugen von Böhm-Bawerk once opined that “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. But as rates reached their lowest level ever in 2016, investors rather worried about the “biggest bond market bubble in history” coming to a violent end. The sharp sell-off in global bonds following the US election seems to confirm their fears. Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded. History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 “bond massacre”.

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Filed under Economic History, Guest Post, Macroeconomics