Global R*

Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi

Recent increases in interest rates around the world, following a multi-decade decline, have intensified the debate on their long-run prospects. Are previous trends reversing or will rates revert to low values as current shocks subside? Answering this question requires assessing the underlying forces driving secular interest-rate trends. In a recent paper, we study the long-run drivers of the global trend interest rate – ‘Global R*’ – in the 70 years up to the pandemic. Global R* fell by more than three percentage points from its peak in the mid-1970s, driven by falling productivity growth and increased longevity. Our results suggest that without a reversal in these trends, or new forces emerging to offset them, long-run Global R* is likely to remain low.

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Supply chain disruptions: shocks, links, and hidden exposure

Rebecca Freeman, Richard Baldwin and Angelos Theodorakopoulos

Supply chain disruptions are routinely blamed for things ranging from elevated inflation to shortages of medical equipment in the pandemic. But how should exposure to foreign supply chains be measured? Using a global input-output database, this post shows that the full exposure of US manufacturing to foreign suppliers (especially China) is much larger than face value measures indicate. Moreover, it argues that the big change in supply chain disruptions in recent years stems from changes in the nature of the shocks (from idiosyncratic to systemic), not the nature of the supply chains.

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The granular origins of exchange-rate fluctuations

Simon Lloyd, Daniel Ostry and Balduin Bippus

How much capital flows move exchange rates is a central question in international macroeconomics. A major challenge to addressing it has been the difficulty identifying exogenous cross-border flows, since flows and exchange rates can evolve simultaneously with factors like risk sentiment. In this post, we summarise a staff working paper that resolves this impasse using bank-level data capturing the external positions of UK-based global intermediaries to construct novel ‘Granular Instrumental Variables‘ (GIVs). Using these GIVs, we find that banks’ United States dollar (USD) demand is inelastic – a 1% increase in net-dollar assets appreciates the dollar by 2% against sterling – state dependent – effects double when banks’ capital ratios are one standard deviation below average – and that banks are a ‘marginal investor’ in the dollar-sterling market.

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Has the import price shock been worse in the UK or euro area?

Josh Martin and Julian Reynolds

How much have higher import prices increased consumer prices in the UK and euro area? This post explores this question using a framework grounded in some fundamental economic and national accounting concepts. Starting with the GDP price, we adjust for relative import and export prices to arrive at a consumer prices measure – this gives us a sense of the impact of import prices and the terms of trade shock on consumer price inflation. For the euro area, aggregating imports across member countries, which includes trade between members, risks overstating total imports and thus the effect on inflation. Using supplementary data to resolve this issue, we find that the euro area terms of trade shock has been larger than the UK’s.

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Did supply constraints tilt the Phillips Curve?

Ambrogio Cesa-Bianchi, Ed Hall, Marco Pinchetti and Julian Reynolds

The remarkable stability of US inflation dynamics in the pre-Covid era had led many to think that the Phillips Curve had flattened. However, the sharp rise in inflation that followed the Covid-19 pandemic ignited a debate on whether the Phillips Curve had steepened and, in particular, whether its slope depends on some particular macroeconomic conditions. Which are these conditions, though? In this post, we argue that one important candidate that could explain this kind of state-dependency in the slope of the Phillips Curve is global supply chain constraints. We propose a simple framework to account for this state-dependency, and conduct econometric analysis on US data which supports its implications – showing that inflation in the US is more responsive to slack when supply constraints are tighter.

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The gravity of cross-border syndication ties in financial services trade

Luke Heath Milsom, Vladimír Pažitka, Isabelle Roland and Dariusz Wójcik

Exports of financial services decline with geographical distance at a rate comparable to that for international trade in goods (eg, Portes and Rey (2005)). This is surprising since there are no transportation costs involved. The consensus is that distance is a proxy for information frictions. We show how cross-border syndication can help overcome information barriers to trade in financial services. We zoom in on the equity underwriting industry where international syndicates reduce information asymmetry between issuers and investors located in different countries.

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What is the information content of oil futures curves?

Julian Reynolds

Moves in oil prices have significant implications for the global economic outlook, affecting consumer prices, firm costs and country export revenues. But oil futures contracts tend to give an imperfect steer for the future path of oil prices because, at any given time, futures contracts may be affected by a wide range of fundamental drivers, besides the expected path of future spot prices. This post presents an empirical methodology to determine the so-called ‘information content’ of oil futures curves. I decompose the oil future-to-spot price ratio into structural shocks, which reflect different fundamental drivers of futures prices, in order to identify the extent to which futures prices reflect market information about the outlook for spot prices.

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Global supply chain risk and resilience

Rebecca Freeman and Richard Baldwin

Supply disruptions caused by systemic shocks such as Brexit, Covid and Russia-Ukraine tensions have catapulted the issue of risk in global supply chains to the top of policy agendas. In some sectors, however, there is a wedge between private and social risk appetite, or increased risks due to lack of supply chain visibility. This post discusses the types of risks to and from supply chains, and how supply chains have recovered from past shocks. It then proposes a risk-reward framework for thinking about when policy interventions are necessary.

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The impact of shipping costs and inflation

Tugrul Vehbi, Serdar Sengul, Daniel Christen, Lucio D’Aguanno and Tom Wise

Shipping costs have increased sharply since the onset of the pandemic, to a magnitude perhaps only a few would have predicted. In this post, we examine the likely drivers and impact of this increase. We argue that (i) both demand and supply factors are responsible for these developments with the former playing a relatively bigger role historically; (ii) shipping costs feed through to consumer prices with a lag; and (iii) therefore, we may expect to see further price pressures in some advanced economies (eg the US and the euro area) from recent surges in shipping rates.

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The Bank of England’s 2022 Priority Topics for research

Alongside our multi-year ‘Bank of England Agenda for Research’, the Bank also publishes a set of ‘Priority Topics’, which change each calendar year. The new 2022 Priority Topics are now available on the Bank’s website (see ‘2022 Priority Topics’ under each theme).

Rebecca Freeman, Managing Editor.