Monthly Archives: May 2018

Would a Central Bank Digital Currency disrupt monetary policy?

Ben Dyson and Jack Meaning

A “Central Bank Digital Currency” (CBDC) may sound like it’s from the future, but it’s something that many central banks are researching today, including those in Sweden, Canada, Denmark, China, and the European Central Bank and Bank of International Settlements (BIS). In a new working paper, we set aside questions about the technological, regulatory and legal aspects of central bank digital currency, and instead explore the underlying economics. Could the existence of a CBDC make it easier or harder for central banks to guide the economy through monetary policy? And could the existence of CBDC make the monetary transmission mechanism (MTM) faster or slower, stronger or weaker?

Continue reading

2 Comments

Filed under Banking, Currency, Macroeconomics, Monetary Policy

Core Design Principles for a Central Bank Digital Currency

Clare Noone and Michael Kumhof

Does the introduction of a central bank digital currency (CBDC) crowd out bank funding? Does it open the door to runs on the aggregate banking system? In a recent Staff Working Paper we provide insights on these questions. We find that some of the major risks to financial stability posed by CBDC can be addressed by a set of four core design principles for a CBDC system. Implementing these principles, however, is non-trivial and risks would remain.

Continue reading

Comments Off on Core Design Principles for a Central Bank Digital Currency

Filed under Banking, Currency, Financial Stability

Home grown financing: How small business owners use their own houses to support investment

Saleem Bahaj, Angus Foulis and Gabor Pinter

Apocalypse Now is widely regarded as a masterpiece of the new Hollywood era. Director Francis Ford Coppola displayed audacious vision and a willingness to take risks. But we don’t just mean artistic risk. Mr Coppola gambled financially too: he staked his Napa Valley house and vineyard on the film, pledging it order to get the $32 million in loans necessary to keep the production on the road.  While his movie was exceptional, there is nothing unusual about Mr Coppola’s financial strategy.  Small business owners worldwide use their personal assets, and often their house, to back loans to their firms: in a new paper, we use microdata for several thousand firms to show how important this can be for UK investment.

Continue reading

1 Comment

Filed under Macroeconomics

US Hurricane Clustering: A New Reality?

Alex Ntelekos, Dimitris Papachristou and Juan Duan

The 2017 Atlantic hurricane season was the fifth most active in 168 years.  It was also one of only six seasons to see multiple Cat 5 hurricanes (Irma & Maria).  These two hurricanes, followed similar tracks and, together with Hurricane Harvey, occurred close together.  This situation can hinder relief efforts.  For insurers it may also lead to resource strain, disputes and unhedged risks, if insurers do not have enough ‘sideways’ reinsurance cover.  Our post asks whether three major hurricanes occurring in the US in close succession really was exceptional or, as our analysis of recent data suggests, it might happen more often in future.  Is the insurance industry underestimating the likely ‘clustering’ of major hurricanes?

Continue reading

Comments Off on US Hurricane Clustering: A New Reality?

Filed under Insurance, Microprudential Regulation

Has the UK’s demand for cars run out of gas?

Simon Kirby, Andre Moreira and Michal Stelmach

New car registrations, a timely indicator of the cyclical position of the economy, fell in 2017 for the first time since 2011. Some have attributed this drop to tax changes which took effect last April. But we think the squeeze on real incomes was a more significant factor. Our analysis also suggests that the rapid growth in new car sales seen from 2013-16 was unlikely to be sustained. Given the expected path of household income we expect new car purchases to remain subdued in 2018, compared to levels seen in recent years.

Continue reading

1 Comment

Filed under Macroeconomics

Algos all go?

Francis Breedon, Louisa Chen, Angelo Ranaldo and Nicholas Vause

Most academic studies find that algorithmic trading improves the quality of financial markets in normal times by boosting market liquidity (so larger trades can be executed more quickly at lower cost) and enhancing price efficiency (so market prices better reflect all value-relevant information). But what about in times of market stress? In a recent paper looking at the removal of the Swiss franc cap, we find that algorithmic trading provided less liquidity than usual, at worse prices, and that its contribution to efficient pricing dropped to near zero. Market quality benefits from a diversity of participants pursuing different trading strategies, but it seems this was undermined in this episode by commonalities in the way algorithms responded.

Continue reading

1 Comment

Filed under Currency, Financial Markets, Financial Stability