Roy Zilberman and William Tayler.
Last year the Bank organised a research competition to coincide with the launch of the One Bank Research Agenda. In this guest post, the authors of the winning paper in that competition, Roy Zilberman and William Tayler from Lancaster Business School, summarise their work on optimal macroprudential policy.
Can macroprudential regulation go beyond its remit of financial stability and also contain inflation and output fluctuations? We think it can and argue that macroprudential regulation, in the form of countercyclical bank capital requirements, is a superior instrument to both conventional and financially-augmented Taylor (1993) monetary policy rules. This is especially true in responding to financial shocks that drive output and inflation in opposite directions, as also observed at the start of the recent financial crisis (see Gilchrist, Schoenle, Sim and Zakrajsek (2016)). This helps to effectively shield the real economy without the need for a monetary policy interest rate intervention. Put differently, a well-designed simple and implementable bank capital rule can achieve optimal policy associated with zero welfare losses.
Continue reading “Macroprudential Regulation: Two birds with one stone?”
The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”. In this guest post, one of the keynote speakers at the event, Andrew Gelman professor of statistics and political science at Columbia University, points out some of the pitfalls of randomly assigned experiments with control groups.
When studying the effects of interventions on individual behavior, the experimental research template is typically: Gather a bunch of people who are willing to participate in an experiment, randomly divide them into two groups, assign one treatment to group A and the other to group B, then measure the outcomes. If you want to increase precision, do a pre-test measurement on everyone and use that as a control variable in your regression. But in this post I argue for an alternative approach- study individual subjects using repeated measures of performance, with each one serving as their own control.
Continue reading “Balancing bias and variance in the design of behavioral studies: The importance of careful measurement in randomized experiments”
Samuel Cole, Jack Sherer-Clarke, Oliver Wallbridge, Annabel Manley.
Each year, the Bank of England organises the Target 2.0 competition for A-level economics students. In this guest post, the winning team at March’s national final from Pate’s Grammar School explain what they would do if they were the MPC…
We decided as a team to hold the Bank Rate at 0.5% and to maintain asset purchases at £375bn. In our view it is not yet time to tighten monetary policy. Though we believe the output gap is small, the economy is yet to reach escape velocity and the Wicksellian natural rate of interest is likely to remain depressed. We are more optimistic on potential supply than other economists and think oil prices will stay low. As such, we predicted that inflation will only reach 1.7% in 2018Q1 compared to the MPC’s median forecast in February of around 2.1% (which has since fallen to 1.9%).
Continue reading “If Pate’s Grammar School set UK Monetary Policy…”