Covid-19 Briefing: International Trade and Supply Chains

Rebecca Freeman and Rana Sajedi

The Covid-19 pandemic has led to both a decline in economic activity that has been propagated across borders through global supply networks, and a rise in barriers to trade between countries. This has led to a rapidly emerging literature seeking to understand the effects of the pandemic on trade. This post surveys some of the key contributions of that literature. Key messages from early papers are that: i) The shock is a hit to both demand and supply, and is thus deeper than what was experienced during the 2008/09 Great Trade Collapse; ii) Global value chains have amplified cross-country spillovers; iii) When supply chains are highly integrated, protectionist measures can disrupt production of medical equipment and supplies; and, hence, iv) Keeping international trade open during the crisis can help to limit the economic cost of the pandemic and foster global growth during the recovery.

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Covid-19 Briefing: Corporate Balance Sheets

Neeltje van Horen

Faced with unprecedented declines in corporate revenue, the Covid-19 shock represents a loss of cash flow of indeterminate duration for many firms. It is too early to tell how exactly firms will be affected by this crisis and how scarring it will be, but the crisis will likely have a significant impact on most corporates. This post reviews the literature on factors affecting firms’ ability to withstand the Covid-19 shock and what large corporates did to shore up their finances.

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Special series: Covid-19 Briefings

Belinda Tracey

Starting today, Bank Underground (BU) is launching a special series of ‘Covid-19 Briefings’. These posts are different to our regular posts – rather than containing primary analysis or the author’s own research, they instead aim to summarise key lessons from the early literature on a particular area of the economics of Covid-19. Each post focuses on a different area, and aims to provide an introduction to key papers, rather than a comprehensive overview of all the literature. As with any BU post, they are the views of the authors, not necessarily those of the Bank. We hope our readers find them helpful in understanding the new, rapidly developing and fast growing body of work on the economics of Covid-19.

Belinda Tracey, Managing Editor

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

There’s more to house prices than interest rates

Lisa Panigrahi and Danny Walker

The average house in the UK is worth ten times what it was in 1980. Consumer prices are only three times higher. So house prices have more than trebled in real terms in just over a generation. In the 100 years leading up to 1980 they only doubled. Recent commentary on this blog and elsewhere argues that this unprecedented rise in house prices can be explained by one factor: lower interest rates. But this simple explanation might be too simple. In this blog post – which analyses the data available before Covid-19 hit the UK – we show that the interest rates story doesn’t seem to fit all of the facts. Other factors such as credit conditions or supply constraints could be important too.

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How important are large firms for aggregate productivity growth in the UK?

Marko Melolinna

Aggregate labour productivity growth has been low in the UK following the global financial crisis in 2008 (Chart 1). The average annual growth rate has been only 0.7% over the period 2008 to 2019, which is around a third of the growth rate seen during the decade preceding the crisis. There are many ways of analysing the reasons for this weakness, but in this blog post, I concentrate on examining the role that the largest firms in the UK have played in the story. Our analysis covering the past three decades from 1990 to 2017 suggests that firm-specific, or idiosyncratic, shocks to the 100 largest firms had a significant effect on aggregate productivity dynamics in the UK.

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Monetary Policy Transmission: Borrowing Constraints Matter!

Fergus Cumming and Paul Hubert

How does the transmission of monetary policy depend on the distribution of debt in the economy? In this blog post we argue that interest rate changes are most powerful when a large share of households are financially constrained. That is, when a higher proportion of all borrowers are close to their borrowing limits. Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

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Housing consumption and investment: evidence from the Help to Buy scheme

Matteo Benetton, Philippe Bracke, João F Cocco and Nicola Garbarino

Academics have made the case for mortgage products with equity features, so that gains and losses due to fluctuations in house values are shared between the household and an outside investor. In theory, the equity component expands the set of affordable properties, without increasing household debt, and default risk. These products have not become mainstream, but in a recent paper, we study a large UK experiment with equity-based housing finance — the Help To Buy Equity Loan scheme. We find that equity loans are mainly used to overcome credit constraints, rather than to reduce investment risk. Unconstrained household prefer mortgage debt over equity loans, suggesting optimism about house price risk. Equity loans could still contribute to house price inflation: we don’t find evidence that houses purchased with equity loans are overpriced, but an assessment of the aggregate effects is beyond the scope of the paper.

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Thrive or dive: can our economy weather the climate crisis?

Marco Minasi-Smith, Fortismere School, London

Marco Minasi-Smith, from Fortismere School, London, is the runner-up of the third Bank of England/Financial Times schools blog competition. The competition invited students across the UK to write a post on the theme: the economy and climate change.

While Australia mourns the human and ecological cost of its ‘black summer’ of fires, the tragedy poses a question for economic policy-makers everywhere: how do we prevent climate crises becoming economic ones?

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Loss aversion: the concept every supplier should be utilising to tackle climate change

India Loader, South Wilts Grammar School

India Loader, from South Wilts Grammar School, is the winner of the third Bank of England/Financial Times schools blog competition. The competition invited students across the UK to write a post on the theme: the economy and climate change.

To help save the planet and gain a competitive edge, cafes should obey a basic rule of behavioural economics by switching from offering discounts for customers who bring their own cups in favour of charging more for disposable ones.

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