Have reforms to the BOE’s operating framework reduced money market volatility, and does this matter for monetary policy transmission?

Matthew Osborne.

Over the last twenty years, the BOE has carried out a number of reforms to its operational framework which have been partly intended to reduce money market volatility. My analysis suggests that these have been successful. Overnight volatility fell by around 90% since the early 2000s and much of this can be explained by the BOE’s reforms. But I find little evidence that this affected the volatility of term rates, which are more important than overnight rates for monetary policy transmission. Therefore, central banks might consider giving less priority to money market volatility when designing their future operating frameworks.

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The growth of peer-to-peer lending platforms and prospects for banks’ disintermediation – hype or real threat?

Paolo Siciliani.

Peer-to-peer lending platforms (P2P platforms) emerged after the financial crisis by catering for pent-up demand for unsecured borrowing from individuals and small businesses. Ten years after the conception of P2P platforms, the question is whether they may soon start to penetrate more mainstream lending markets and thereby challenge high street lenders. For example, according to the latest survey compiled by Nesta, P2P lending for the year 2015 was the equivalent of 3.9% of new loans lent to SMEs, although the outstanding stock of P2P lending is much lower. This post considers how seriously in practice to take this threat to the traditional banking model.

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How financial variables can help in identifying the output gap in the UK

Marko Melolinna.

Like in most advanced economies, output fell significantly in the UK in the aftermath of the financial crisis. There is an ongoing debate on to what extent this fall could be explained by output having grown above its sustainable level; in other words, was there a positive output gap before the crisis? I argue that using financial market indicators in addition to more traditional macroeconomic variables to explain output fluctuations helps in constructing a consistent real-time narrative of a positive pre-crisis output gap in the UK.

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Less is more: what does mindfulness mean for economics?

Dan Nixon.

Economic theory generally assumes that more consumption means greater happiness. This post puts forward an alternative, “less is more” perspective based around the concept of mindfulness. It argues that we may achieve greater happiness by seeking to simplify our desires, rather than satisfy them. The result – less consumption but greater wellbeing – could be especially important for debates around secular stagnation and ecological sustainability.

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Shocks Happen: Are Retail Deposits the Answer?

John Hill and Jeremy Chiu.

In September 2007, Northern Rock became the victim of the UK’s first bank-run since 1878. Northern Rock had lost access to the wholesale markets on which it relied for its funding. Bank funding has remained a key issue for policymakers in the wake of the crisis, and has been the subject of new rules designed to promote funding resilience. Today, banks are more reliant on retail deposits for their funding, but this could present other issues for the dynamics of retail deposits that are less well understood. In this post, we introduce some of our own research that shows that banks are unable to raise deposits quickly in order to plug funding gaps opened up by adverse shocks.

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Friedman was right: flexible exchange rates do help external rebalancing

Fernando Eguren-Martin.

Do exchange rate regimes matter for the formation of countries’ external imbalances? Economists have thought so for over sixty years, and policymakers have made countless recommendations based on that presumption. But this had not been tested empirically until very recently, so it remained an opinion rather than a fact. In this post I show that having a flexible exchange rate regime leads to the correction of external imbalances in developing countries, offering some empirical support to a widely held belief. In contrast, this does not seem to be the case for advanced economies.

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Bank liquidity requirements: How to get more bang for your buck

Iñaki Aldasoro, Ester Faia, Gerardo Ferrara, Sam Langfield, Zijun Liu and Tomohiro Ota.

We make the case for a macroprudential approach to liquidity requirements in the cross-section of banks. Currently, the liquidity coverage requirement is applied uniformly across banks. This microprudential approach overlooks externalities: owing to their size, complexity and position in the interbank funding network, some banks can cause inordinate damage to the rest of the banking system. When externalities are taken into account, we show that these systemically important banks should be subject to more stringent liquidity requirements. This cross-sectional macroprudential approach promises “more bang for the buck”: systemic risk can be reduced without increasing the stringency of liquidity requirements for the banking system as a whole.

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International business cycle synchronization: what is the role of financial linkages?

Ambrogio Cesa-Bianchi, Jean Imbs and Jumana Saleheen.

It is a well-known fact that financial integration has increased dramatically over the past few decades. Has this rise led to higher or lower business cycle synchronization? The answer depends crucially on the source of the shock. In response to common shocks, financial integration tends to lower business cycle synchronization. But in response to a country-specific shock, business cycles are more synchronised between countries that are more ﬁnancially integrated.

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What explains the fall in sterling corporate bond issuance?

David Elliott and Menno Middeldorp.

Sterling could be falling out of favour when companies choose which currency to borrow when issuing bonds. Annual gross sterling issuance has almost halved since 2012, and sterling’s share of global issuance in 2015 was the lowest on record. According to those active in the sterling corporate bond market, some of the reasons for this decline are structural. These include changes in the investor base, annuities reform, and competition from the euro corporate bond market. These changes to the demand for sterling corporate bonds imply higher costs of bond issuance. Firms with limited access to foreign currency bond markets, such as small UK-focussed firms, or those with a lower credit rating, may face higher borrowing costs as a result.

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Modelling banking sector shocks and unconventional policy: new wine in old bottles?

James Cloyne, Ryland Thomas and Alex Tuckett.

The financial crisis has thrown up a huge number of empirical challenges for academic and professional economists. The search is on for a framework with a rich enough variety of financial and real variables to examine both the financial shocks that caused the Great Recession and the unconventional policies, such as Quantitative Easing (QE), that were designed to combat it. In a new paper we show how using an older structural econometric modelling approach can be used to provide insights into these questions in ways other models currently cannot. So what are the advantages of going back to an older tradition of modelling?
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