Markup matters: monetary policy works through aspirations

Tim Willems and Rick van der Ploeg

Since the post-Covid rise in inflation has been accompanied by strong wage growth, interactions between wage and price-setters, each wishing to attain a certain markup, have regained prominence. In our recently published Staff Working Paper, we ask how monetary policy should be conducted amid, what has been referred to as, a ‘battle of the markups’. We find that countercyclicality in aspired price markups (‘sellers’ inflation’) calls for more dovish monetary policy. Empirically, we however find markups to be procyclical for most countries, in which case tighter monetary policy is the appropriate response to above-target inflation.

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Another reason to care about investment taxes

Alex Kontoghiorghes

Do lower taxes lead to higher stock prices? Do companies consider tax rates when deciding on their dividend pay-outs and whether to issue new capital? If you’re thinking ‘yes’, you might be surprised to know that there was little real-world evidence (let alone UK-based evidence) which finds a strong link between personal investment tax rates on the one hand, and stock prices and the financial decisions of companies on the other. In this post, I summarise the findings from a recent study which shows that capital gains and dividend taxes do indeed have big effects on risk-adjusted equity returns, as well as the dividend, capital structure, and real investment decisions of companies.

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New money, old money

David Rule and Iain de Weymarn

Technologies such as distributed ledgers create the possibility of new forms of digital money, whether privately-issued ‘stable coins’, tokenised commercial bank deposits, or central bank digital currencies. Authorities are considering a world where digital money circulates alongside existing forms of money. In the past, the nature of money has often changed. Prior to the late-seventeenth century, English money comprised predominantly silver coin and in the subsequent two centuries mainly gold coin, before evolving to include paper banknotes and bank accounts linked to card, internet and app-based payment systems. But what can a previous period when money changed – 1695–97, when paper money first began to circulate alongside coin – tell us about the possible transition to digital money?

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How resilient are UK corporate bond issuers to refinancing risks?

Laura Achiro and Neha Bora

Central banks in most advanced economies have tightened monetary policy by raising interest rates. Tighter financing conditions may make it harder for some businesses to refinance their debt or could mean they face less favourable terms when they do. This blog explores the extent to which bond maturities could crystallise these refinancing risks. Overall, UK corporate bond issuers appear broadly resilient to higher financing costs, but risks are higher for riskier borrowers particularly if the macroeconomic outlook and funding conditions were to deteriorate.

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