Gender imbalance in economics: what next?

Misa Tanaka

This post by Misa Tanaka is based on her talk at the Royal Economic Society’s webinar on Gender Imbalance in UK Economics which took place on 6 October. She is Head of Research at the Bank of England and a member of the Royal Economic Society’s Women’s Committee. 

The latest report on the Gender Imbalance in UK Economics by the Royal Economic Society (RES) Women’s Committee makes a depressing read. In a nutshell, little if any progress has been made in women’s representation in academic economics in the past decade. A well-considered action plan is needed to improve gender balance and diversity in the discipline, if the next decade is to look any different.

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Pinning the tail on the economy: why domestic developments aren’t enough

Simon Lloyd and Ed Manuel

Central banks don’t just care about what is expected to happen. They also care about what could happen if things turn out worse than expected. In line with this, an emerging literature has developed models for measuring and predicting overall levels of macroeconomic risk. This body of work has focused on estimating the level of ‘tail risk‘ in a country by monitoring a range of domestic developments. But this misses a key part of the picture. In a recent Staff Working Paper, we show that monitoring developments abroad is as important as monitoring developments at home when assessing the vulnerability of the economy to a severe downturn.

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Weighed down by debt? Revisiting the link between corporate debt overhang and investment

Bruno Albuquerque

Prior to the Covid-19 (Covid) shock hitting the world economy in March 2020, concerns about US corporate debt sustainability were on the radar of the media and policymakers. Corporates had been accumulating debt at a rapid pace, leading to a record-high debt level of 47% of GDP in 2019. To what extent may the accumulation of debt amplify the ongoing crisis, and delay the US recovery? And what can we learn from past episodes of firm-specific debt booms? In a new paper, I revisit these questions using data for a large panel of US firms from the mid-1980s to just before the pandemic. I find that persistent debt booms led financially constrained firms to cut back on investment, across both capital expenditures and intangible assets.

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Household debt and consumption revisited

Philip Bunn and May Rostom

The academic literature finds that the build-up of household debt before the 2008 financial crisis is linked to weaker consumption afterwards. But there is wider debate over the mechanisms at play. One strand of literature emphasises debt overhang acting through the level of leverage. Others find it was over-optimism acting through leverage growth. In this post, we revisit our previous analysis on leverage and consumption in the UK using synthetic cohort analysis. The correlation between leverage measures and their link to other macroeconomic variables mean it’s challenging to tease out their effects. Yet we find that whilst both mechanisms played a role, there is evidence that debt overhang linked to a tighter credit constraints was the bigger driver.

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Slow recoveries, endogenous growth and macroprudential policy

Dario Bonciani, David Gauthier and Derrick Kanngiesser

Following the global financial crisis in 2008, central banks around the world introduced tighter banking regulations to increase the resilience of the financial sector and reduce the risks of severe financial disruptions during economic downturns. This fact has motivated a large body of literature to assess the role that macroprudential (MacroPru) policies play in mitigating the severity of recessions. One common finding is that the benefits of MacroPru are relatively minor within standard dynamic stochastic general equilibrium (DSGE) models. In a new paper, we show that MacroPru becomes significantly more important in a model that accounts for the long-term negative consequences of financial disruptions.

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Does corporate leverage amplify economic downturns? A dive into the literature

Sudipto Karmakar, Alexandra Varadi and Sarah Venables

This post reviews the literature on the consequences of debt for corporate and macroeconomic outcomes, drawing both on the pandemic period and on previous financial crises. Lessons from previous crises show that high leverage can amplify corporate risks and economic downturns by: increasing reliance on external financing that may dry up in stress; through debt overhang problems; or by increasing linkages between corporates and other sectors of the economy. Corporate debt may also be correlated with negative outcomes in the pandemic as well, but it is still early to draw direct conclusions.

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What do two million accounts tell us about the impact of Covid-19 on small businesses?

James Hurley, Sudipto Karmakar, Elena Markoska, Eryk Walczak and Danny Walker

Compass on old map

This post is the second of a series of posts about the Covid-19 pandemic and its impact on business activity.

Covid-19 led to a sharp reduction in economic activity in the UK. As the shock was playing out, small and medium-sized businesses (SMEs) were expected to be more exposed than larger businesses. But until now, we have not had the data to analyse the impact on SMEs. In a recent Staff Working Paper we use a new data set containing monthly information on the current accounts of two million UK SMEs. We show that the average SME saw a very large drop in turnover growth and that the crisis played out very differently for different types of SMEs. The youngest SMEs in consumer-facing sectors in Scotland and London were hit hardest.

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On the origin of systemic risk

Giovanni Covi, Mattia Montagna and Gabriele Torri

Systemic risk in the bank sector is often associated with long periods of economic downturn and large social costs. In a new paper, we develop a microstructural contagion model to disentangle and quantify the different sources of systemic risk for the euro-area banking system. Calibrated to granular euro-area data, we estimate that the probability of a systemic banking crisis was around 3.6% in 2018. Seventy per cent of the risk stems from economic risks, with fire sales and contagion risk accounting for most of the remainder and only a small role for interbank exposures. Our findings suggest that correlations among banks’ losses play a crucial role in the origins of systemic risk.

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What types of businesses have used government support during the Covid-19 pandemic?

Will Banks, Sudipto Karmakar and Danny Walker

This post is the first of a series of posts about the Covid-19 pandemic and its impact on business activity.

During the pandemic, UK businesses have received unprecedented levels of government support, set to total 9% of GDP. This has mainly been through the Coronavirus Job Retention Scheme (CJRS), under which 1 in 3 employees have been furloughed, and the government-guaranteed loan schemes that were used by 1 in 4 businesses. Despite the scale of this support, little has been said about which businesses received it. In this post we combine data on loan scheme and CJRS usage with a data set on the characteristics of businesses. We find that small, relatively old and sophisticated, labour-intensive businesses in the sectors most vulnerable to the impacts of the pandemic are most likely to have received both types of support.

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Procyclicality mechanisms in the financial system: what we know and some open questions

Robert Czech, Simon Jurkatis, Arjun Mahalingam, Laura Silvestri and Nick Vause

Financial markets reflect changes in the economy. But sometimes they amplify them too. Both of these roles were evident as the Covid-19 (Covid) pandemic materialised. As the economic outlook deteriorated, risky asset prices fell in reflection of that. And those falls were amplified as some investors reacted by liquidating assets. That also amplified increases in financing costs for companies issuing new debt or equity, which could have further damaged economic prospects. Various ‘procyclical’ mechanisms contributed to this macrofinancial feedback loop, as shown in Figure 1. This post reviews findings from research about these particular mechanisms, covering (i) how they work, (ii) how strong they are and (iii) how they might be mitigated. And, where there are gaps, it suggests new research.

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