Before Bank Underground goes off on its Christmas holidays, it’s time for the Annual Bank Underground Christmas Quiz! We hope you enjoy testing your knowledge on our festive themed questions on economics, finance and all things central banking…
Continue reading “The Bank Underground Christmas Quiz 2024”Rebecca Mari and Matteo Ficarra.
Floods are the most costly natural disaster in Europe. In the UK, they account for around GBP1.4 billion in annual losses. Yet, evidence on the macroeconomic implications is inconclusive. GDP often shows a puzzling delayed response, and prices can be pushed in opposite directions. Using a novel county level data set for England for the years 1998–2021, we estimate the impact of flooding on output and inflation at the sector level. Sectors react heterogeneously to floods, which explains well aggregate evidence. Prices respond in sectors related to both headline and core inflation, which has crucial implications for monetary policy. We further show that investing in flood defences mitigates the economic burden of floods by strongly reducing the risk of flooding.
Continue reading “Weathering the storm: the economic impact of floods and the role of adaptation”David Elliott, Ralf Meisenzahl and José-Luis Peydró
Capital flows and credit growth are strongly correlated across countries. Macroeconomic evidence suggests that this ‘global financial cycle’ is largely driven by US monetary policy: expansionary policy by the Federal Reserve drives increases in lending globally, while contractionary Fed policy leads to a tightening of global financial conditions. Existing academic literature emphasises the role of banks in propagating these US monetary policy spillovers. But in recent decades, nonbank financial intermediaries have grown in importance. In a recent paper, we investigate the impact of US monetary policy on international dollar lending by nonbanks relative to banks, and show that nonbank lenders play an important role in absorbing US monetary policy shocks.
Continue reading “Nonbank lenders as global shock absorbers”Francesca Diluiso and Aydan Dogan
To achieve the emissions reduction targets outlined in The Paris Agreement, many economies have started implementing various types of climate policies. These policies, which include subsidies for green production or investment, carbon taxes, and cap and trade schemes, are crucial for guiding the transition to a greener economy. However, by altering the cost and the emission intensity of domestically produced goods, they may have an impact on inflation, output, and international trade flows. This blog post explores the spillover effects due to the implementation of climate policy in a single country. We examine two major types of policies currently implemented and discussed worldwide: green subsidies and carbon taxes.
Continue reading “International spillovers from climate policy”Aydan Dogan, Melih Firat and Aditya Soenarjo
How does the use of imported inputs in production affect inflation dynamics in the UK? Over the past few decades, with the rise of global value chains (GVCs), production processes have become increasingly interlinked across countries and sectors. This interconnection means that firms’ pricing decisions are now more influenced by foreign factors. The importance of globalisation in shaping inflation dynamics was highlighted during the supply-chain disruptions caused by the Covid-19 crisis. In a recent paper, we explore the impact of the rising share of imported intermediate goods on the UK Phillips curve. We show that UK industries with higher shares of intermediate imports from emerging market economies (EMEs) have flatter Phillips curves.
Continue reading “Global value chains and inflation: how imported inputs shape UK prices”Aydan Dogan and Ida Hjortsoe
Exporting allows firms to access a larger market, but it also implies costs and risks. Some of these costs and risks are due to the time between production and sales generally being longer for exported goods than for goods sold in the domestic market. In our recent Staff Working Paper, we find that among UK manufacturing firms, exporters tend to have more liabilities than non-exporters, and we show that the link between short-term liabilities and labour costs is significantly tighter for exporters. This novel evidence supports the view that exporters’ short-term liabilities help cover costs and risks over the longer time period between production and sales. Consequently, financial conditions are likely to affect exporters more than non-exporters.
Continue reading “Why short-term finance matters (a lot more) to exporting firms”Marco Garofalo, Giovanni Rosso and Roger Vicquery
Most international trade is denominated in dominant currencies such as the US dollar. What explains the adoption of dominant currency pricing and what are its macroeconomic implications? In a recent paper, we explore a rare instance of transition in aggregate export invoicing patterns. In the aftermath of the depreciation that followed the Brexit referendum in 2016, UK exporters progressively shifted to invoicing most of their exports in dollars, rather than in pounds. This was driven by firms more exposed to currency mismatches, eg exporting in pounds but importing in dollars before the depreciation. As a result of this aggregate transition to dollar pricing, a dollar appreciation now depresses demand for UK exports by twice as much than before 2016.
Continue reading “Selling England (no longer) by the pound: currency-mismatches and the dollarisation of UK exports”Julian Reynolds
Policymakers and market participants consistently cite geopolitical developments as a key risk to the global economy and financial system. But how can one quantify the potential macroeconomic effects of these developments? Applying local projections to a popular metric of geopolitical risk, I show that geopolitical risk weighs on GDP in the central case and increases the severity of adverse outcomes. This impact appears much larger in emerging market economies (EMEs) than advanced economies (AEs). Geopolitical risk also pushes up inflation in both central case and adverse outcomes, implying that macroeconomic policymakers have to trade-off stabilising output versus inflation. Finally, I show that geopolitical risk may transmit to output and inflation via trade and uncertainty channels.
Continue reading “Quantifying the macroeconomic impact of geopolitical risk”Samuel Smith and Marco Pinchetti
Recent events in the Middle East, as well as Russia’s invasion of Ukraine, have sparked renewed interest in the consequences of geopolitical tensions for global economic developments. In this post, we argue that geopolitical risk (GPR) can transmit via two separate and intrinsically different channels: (i) a deflationary macro channel, and (ii) an inflationary energy channel. We then use a Bayesian vector autoregression (BVAR) framework to evaluate these channels empirically. Our estimates suggest that GPR shocks can place downward or upward pressure on advanced economy price levels depending on which of the two channels the shock propagates through.
Continue reading “The transmission channels of geopolitical risk”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.
Continue reading “Global R*”