Does macroprudential regulation spillover to foreign financial systems through inter-bank linkages? This question has received a lot of attention in recent years given the discord between the international nature of the global financial system and its regulation and supervision by national jurisdictions (e.g. this article). For example, subsidiaries of Spanish banks issue almost half of all credit issued by commercial banks in Mexico. These subsidiaries are also fully owned by their parent banks headquartered in Spain. Therefore, it is quite natural to ask whether macroprudential regulations in Spain can have unintended consequences on the Mexican financial system and the Mexican economy in general. While Mexican subsidiaries of Spanish banks are de-jure ring-fenced from regulations in Spain, does this hold de-facto?
Continue reading “The Spanish Connection – Consequences of a macroprudential regulation in Spain on Mexico”
Noëmie Lisack, Rana Sajedi and Gregory Thwaites
An unprecedented ageing process is unfolding in industrialised economies. The share of the population over 65 has gone from 8% in 1950 to almost 20% in 2015, and is projected to keep rising. What are the macroeconomic implications of this change? What should we expect in the coming years? In a recent staff working paper, we link population ageing to several key economic trends over the last half century: the decline in real interest rates, the rise in house prices and household debt, and the pattern of foreign asset holdings among advanced economies. The effects of demographic change are not expected to reverse so long as longevity, and in particular the average time spent in retirement, remains high.
Continue reading “Population ageing and the macroeconomy”
Carlos Eduardo van Hombeeck
The UK has a comparative advantage in financial services. But specialisation in this activity brings with it the challenge of the large gross capital flows that are linked to financial services exports.
Continue reading “Bitesize: Financial services exports and financial openness: two sides of the same coin”
Stephen Burgess and Rachana Shanbhogue
In 2016 the UK’s current account deficit was 5.9% of GDP, the widest since official records began in 1948. Many economists, including the IMF and FPC have suggested the UK is therefore vulnerable to foreign investors becoming less willing to invest in the country. In this post we challenge the idea that the UK is at the mercy of the “kindness of strangers”. Looking at gross, rather than net capital flows since 2012 suggests inflows have been extremely subdued relative to past levels. Instead, the UK has benefitted from increasing capital gains on past foreign investments and used these to fund its spending. We argue this carries lower financial stability risks than relying on gross inflows to cover the current account deficit.
Continue reading “A prince not a pauper: the truth behind the UK’s current account deficit”
Almog Adir and Simon Whitaker
In the last few years there has been a small net overall flow of capital from advanced to emerging market economies (EMEs), in contrast to the ‘paradox’ prevailing for much of this century of capital flowing the ‘wrong’ way, uphill from poor to rich countries. In this post we show the ‘paradox’ in the aggregate flows actually concealed private capital flowing the ‘right’ way for much of the time. And even during recent turbulence, foreign direct investment (FDI) flows, likely to be particularly beneficial to growth, have persisted. But EMEs could still benefit more from harnessing capital from advanced economies and Argentina has set a useful precedent as it prepares to take over the Presidency of the G20 in 2018.
Continue reading “Do rich countries lend to poor countries?”
Despite decades of trade deficits (spending more on foreign products than foreigners spend on UK products), the UK’s net liability with the rest of the world remains negligible. How does it pull off that trick? By earning a higher return on its foreign assets than it pays on its foreign liabilities.
Continue reading “Bitesize: Trading your way out of debt”
Aidan Saggers and Chiranjit Chakraborty
Investment in the Financial Technology (FinTech) industry has increased rapidly post crisis and globalisation is apparent with many investors funding companies far from their own physical locations. From Crunchbase data we gathered all the venture capital investments in FinTech start-up firms from 2010 to 2014 and created network diagrams for each year.
Continue reading “Bitesize: Flourishing FinTech”
Ambrogio Cesa-Bianchi , Chris Redl, Andrej Sokol and Gregory Thwaites
Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.
Continue reading “Does domestic uncertainty really matter for the economy?”
The Law of One Price (LOOP) is an old idea in economics. LOOP states that the same product should cost the same in different places, expressed in the same currency. The intuition is that arbitrage (buying a product where it is cheap and selling it where it is expensive) should bring prices back into line. Can LOOP help us understand UK inflation? Yes. I find EU prices have much higher explanatory power for UK prices than domestic cost pressures, and the effects of exchange rate changes last longer, but build more slowly than commonly assumed.
Continue reading “A LOOPy model of inflation”
Mark Joy, Noëmie Lisack, Simon Lloyd, Rana Sajedi and Simon Whitaker
Trade liberalisation since the 1990s has boosted living standards by raising productivity growth. However, it has been predominantly skewed towards reducing barriers to goods trade, rather than services. Since then, goods-focussed exporters have seen increased current account surpluses, and those focussed on services, have seen increased deficits. Could these developments be causally related? In this post we argue that simple tweaks to a canonical two-country model can generate this result, and building on the Governor’s Mansion House Speech, we present empirical evidence that trade liberalisation has affected current account positions asymmetrically. That suggests future liberalisation of services trade, as well as generating increased gains from trade, could also help to reduce global imbalances.
Continue reading “Mind the gap: Services trade liberalisation and global imbalances”