Zooming in: firm-level expectations for economy-wide inflation

Federico Pessina, Maren Froemel and Ivan Yotzov

Understanding inflation expectations is key for monetary policy makers and has been central to the policy debate in recent years. We use data from the Decision Maker Panel (DMP) – an economy-wide UK business survey – to analyse businesses’ expectations about aggregate CPI inflation, and the relationship with their own-price expectations. On average, firms are attentive to current inflation rates, but larger and more productive firms report more accurate perceptions and expectations. In recent years, both one-year and three-year CPI expectations have become more sensitive to inflation perceptions, and three-year CPI expectations have also become more sensitive to one-year expectations. Finally, aggregate dynamics matter for firms’ decisions: CPI expectations are correlated with firms’ own-price expectations and more so for more productive firms.

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Bond financing conditions and economic activity in the UK: aggregate and firm-level evidence

Eduardo Maqui, Nicholas Vause and Márcia Silva-Pereira

In recent decades, the corporate bond market has grown from a relatively niche source of finance for UK corporations to a central pillar alongside bank loans. This transition raises an important question: as with bank credit conditions, have supply conditions in the corporate bond market come to significantly affect UK economic activity? Our recent research suggests the answer is a resounding yes. We show that a measure of corporate bond financing conditions − the Excess Bond Premium (EBP) − not only anticipates macroeconomic outturns in the UK, but also influences investment by UK firms, especially those that are highly leveraged and more reliant on bond finance.

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Monetary policy, state-dependent bank capital requirements and the role of non-bank financial intermediaries

Manuel Gloria and Chiara Punzo

The expansion of non-bank financial institutions (NBFIs) is transforming the financial landscape and introducing fresh challenges for financial stability and oversight at the same time as creating opportunities. Using a dynamic stochastic general equilibrium (DSGE) model, we find that while NBFIs may enhance long-term welfare for households and entrepreneurs in normal conditions, their greater role also heightens vulnerabilities to severe shocks in the financial system. Greater NBFI activity boosts competition in the financial sector, leading to more efficient resource allocation. A working paper detailing these results was recently published.

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