What are the effects of fiscal policy at the zero lower bound?

R. Anton Braun, Lena Boneva & Yuichiro Waki.

Does fiscal policy have large and qualitatively different effects when the nominal interest rate is zero? An emerging consensus in the New Keynesian literature is that supply-side fiscal stimulus is ineffective at the zero lower bound (ZLB) while demand-side fiscal stimulus is a useful tool to escape a liquidity trap. But new evidence provided in our paper suggests that supply-side fiscal policies can play an important role at the ZLB while the effects of demand-side stimulus may be weaker than previously found.

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The danger zone – when should we worry about how much households spend on their mortgages?

Philip Bunn.

As households spend more of their income making payments on loans they are more likely to get into arrears. This risk rises gradually at first, but above a certain point they enter a danger zone where the probability of arrears rises sharply. Knowing where this danger zone lies is really important because, if it comes a little earlier or a little later, that can make a big difference to the number of people who fall into it, although as this post shows, it is hard to identify this danger zone precisely. Nevertheless, understanding what leads households to get into financial difficulty is crucial for assessing how such difficulties might increase following rises in interest rates or unexpected falls in income.
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The declining sensitivity of asset prices to events in Greece

Menno Middeldorp.

The risk of Greece exiting the euro area (Grexit) has unsettled financial markets regularly over recent years. A New Year poll suggested that most Greeks feel that 2016 will see the threat of Grexit return. However, even if the probability of Grexit rises again, that does not necessarily mean that financial markets will respond with similar volatility. Indeed, this post shows that, based on the sensitivity of international asset prices to those in Greece itself, each successive episode of Greek stress has in turn caused less stress abroad.

To measure the sensitivity of global financial markets to Grexit risk I regress euro area, UK and US asset prices on a composite of Greek asset prices. I do this for three different episodes when Greek financial markets exhibited signs of stress and there was also a high volume of news articles on Bloomberg that referred to Grexit risk. For most euro area, UK and US asset prices, their sensitivity to Greek stress declined in each successive episode.

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Houses: who has stopped buying them?

Lizzie Drapper and Hasdeep Sethi.

In 2006, 64 English houses in every 1000 changed hands. Three years and a credit crunch later, this had halved to only 32 transactions per 1000 houses. Since 2009, transactions have recovered, but remain well below their pre-crisis level (Chart 1). Transactions are a key metric of the health of the UK housing market and can be seen as a measure of “liquidity”. The reasons behind low transactions levels may also provide further insight into people’s behaviour and view of housing in the UK. In the work set out below, we conclude that it is unlikely that transactions regain their pre-crisis level any time soon, because of affordability constraints for first-time buyers and fewer discretionary moves by existing owners.

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Too eagerly anticipated: The impact of the extension of ECB QE on asset prices

Menno Middeldorp and Oliver Wood.

When the ECB announced an extension of its asset purchase programme on December 3 2015, the euro appreciated, bond yields rose and equity prices fell. This does not mean that the extension tightened monetary policy, but merely that it was smaller than what markets had priced in. In order to calculate the full impact of the programme on asset prices, we need to measure both the anticipation effect and announcement effect and add the two up. Our analysis suggests that the announcement effect undid about half of the anticipation effect, and so the extension of asset purchases still pushed down yields, supported equity valuations and depreciated the euro. However, compared to the initial programme, its impact on asset prices was smaller.
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Stress tests: The small print matters

Dirk Tasche.

Stress testing is ubiquitous in today’s banking supervision regime. The stress test results are eagerly anticipated and received by the public and can have serious consequences for banks presenting ‘bad’ numbers. The public discussion of the stress scenarios seems to be focussed on their economic meaning (here is an example). The statistical smallprint relating to stress tests receives much less public attention. I pick up two modelling choices for closer inspection:

Stress scenarios are meant to be point scenarios.
Stress test results tend to be presented as single values.

I demonstrate that depending on the understanding of the scenario and the representation of the results, there is a wide range of plausible outcomes of a stress test.

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Is sterling ever a fashionable currency?

Jihyoung Yi.

Despite the fact that the US dollar and the euro are the most traded currencies in terms of shares of average daily turnover (2013, BIS), my analysis suggests that foreign exchange rate (FX) market trends are usually driven by other currencies. Most notably, ‘commodity’ currencies (such as the Australian dollar and Mexican peso) and ‘carry-trade’ currencies (such as the Swiss franc and Japanese yen) tend to be the main drivers. In contrast, sterling typically does not often drive currency movements – FX strategists often consider that it is rare for sterling to be ‘the story’ amongst the speculative community in the FX market. But this is not always the case. This blog post zooms in on a selection of sub-periods to show when particular currencies, including sterling, became ‘focal’.

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How do firms adjust to falls in demand?

Srdan Tatomir.

How do firms response to falls in demand for their products in the real world? Do they cut wages? Or are they able only to freeze them? What other methods can they use to adjust their labour costs? And does any of this matter? The answer to the final question is emphatically yes. How firms adjust the quantity and cost of their labour input, particularly in response to a downturn, is relevant for monetary policy. If firms are unable to cut wages – what economists call ‘downward nominal wage rigidity’ (DNWR) – then they have to reduce the number of employees, increasing unemployment, further depressing output and weighing on inflation.

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When banks say ‘No’: how the credit crunch lowered UK productivity

Jeremy Franklin, May Rostom & Gregory Thwaites.

In the aftermath of the 2007/8 financial crisis bank lending to firms fell back sharply and investment plummeted. And at the same time, growth in labour productivity and wages fell, with neither fully recovering since (Chart 1). Are these facts causally linked, and if so, in which direction? Did firms stop borrowing because they had no good uses for the money, or did banks cut lending, making it harder for firms to do business? In a new paper, we find a way to distinguish between the two. We measure how changes in the amount firms were able to borrow affected how much they invested, how much their workers produced and earned, and how likely firms were to survive.

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What do Agents’ company visit scores say about the weakness of wage growth?

Simon Caunt, David England and Imogen Shepherd.

AWE growth has picked up over the past year but stalled in recent months, remaining some way below pre-recession levels. Should we expect that weakness to continue? One way to gauge wage pressures is through the company visit scores (CVS) the Bank’s Agents assign for businesses they meet. Agents score a range of variables, including turnover, employment and costs, -5 to +5, generally according to growth. An anonymised CVS dataset is published on the Bank’s website. Here we look at what CVS say about prospects for pay, considering factors such as recruitment difficulties, low inflation, public sector pay and the National Living Wage. Overall, we think this evidence points to continued modest rates of wage growth over the coming year.

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