Schrodinger’s market: what the quantum internet could mean for the financial system

Ed Hill

Once the stuff of science fiction, quantum technologies are advancing fast. Individual quantum computers are finding a range of applications, primarily driven by the immense speed-ups they offer over normal computers. And soon the nascent quantum internet should connect those isolated computers together. This blog post starts to think about what this new interconnected quantum world means for the financial system. What could the first ‘quantum markets’ look like? What algorithms and infrastructure might they leverage? And where might the differences from classical markets lie?

Continue reading →

Beyond the average: patterns in UK price data at the micro level

Lennart Brandt, Natalie Burr and Krisztian Gado

The Bank of England has a 2% annual inflation rate target in the ONS’ consumer prices index. But looking at its 700 item categories, we find that very few prices ever change by 2%. In fact, on a month-on-month basis, only about one fifth of prices change at all. Instead, we observe what economists call ‘sticky prices’: the price of an item will remain fixed for an extended amount of time and then adjust in one large step. We document the time-varying nature of stickiness by looking at the share of price changes and their distribution in the UK microdata. We find a visible discontinuity in price-setting in the first quarter of 2022, which has only partially unwound.

Continue reading →

How auction design can make a difference: the case of the Bank’s Indexed Long-Term Repo Facility

Julia Giese and Charlotte Grace

In response to the global financial crisis, the Bank of England (BoE) began using Product-Mix Auctions (PMA) to provide liquidity insurance to financial institutions. The PMA, designed by Paul Klemperer, allows the quantity of funds lent against different types of collateral to react flexibly to the economic environment and market stress. It maximises overall surplus, or ‘welfare’, assuming bidders bid their true values for loans. Mervyn King, the then BoE Governor, described the BoE’s use of PMAs as ‘a marvellous application of theoretical economics to a practical problem of vital importance‘. In this post, we describe a staff working paper that shows that the PMA generates welfare gains relative to simpler alternative auction designs, which cannot achieve such fine-tuned responses.

Continue reading →