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.

Quantifying the full impact of country-specific policies on trade flows

Rebecca Freeman, Mario Larch, Angelos Theodorakopoulos and Yoto V Yotov

Most economists rely upon the structural gravity model as a best tool to analyse the impact of trade policies on bilateral trade flows. However, while the gravity model is well suited to examine the impact of bilateral trade costs – such as tariffs imposed by exporter-importer pairs – it is poorly equipped to estimate the impact of country-specific policies because standard controls subsume their effects. This is problematic, as in practice many policy-relevant trade costs are country-specific. This post proposes a solution to this problem and discusses new methods to identify the full impact of country-specific characteristics within the structural gravity framework. A useful byproduct of our methods is that they deliver disaggregate trade elasticity estimates without the need for price/tariff data.

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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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I need a dollar, dollar, a dollar is what I need

Ambrogio Cesa-Bianchi and Fernando Eguren-Martin

In March 2020, the Covid-19 (Covid) outbreak turned the world upside down. With economies virtually shut, financial markets were an exception and remained open. However, it was not business as usual for them: the increased need to meet immediate obligations, and a more generalised increase in risk aversion, led investors to liquidate positions in favour of hard old cash. In a recent Staff Working Paper we pose that investors did not seek any type of cash but rather that the world witnessed a ‘dash for dollars’. We show that the resulting race for dollars went beyond exchange rate markets and led to selling pressure on dollar bonds in corporate bond markets, which experienced particularly large increases in spreads.

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Cloudy with a chance of tariffs: the impact of policy uncertainty on the global economy

Ed Manuel, Alice Pugh, Anina Thiel, Tugrul Vehbi and Seb Vismara

Average tariffs on goods traded between the US and China increased by 15 percentage points from early 2018 to 2019. By making it more costly to buy goods from abroad, higher tariffs have reduced global trade flows and spending by households and businesses. But ‘direct’ effects of tariffs are not the only ways in which trade-related issues can affect global growth. Trade-related uncertainty has risen sharply since the escalation of trade tensions in 2018, which may have caused businesses to postpone costly investment decisions and financial conditions to tighten. In this post we investigate the size of these ‘indirect’ channels.

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Le Pont de Londres: monetary policy spillovers, prudential policies and the financial centre effect

Robert Hills, Simon Lloyd, Rhiannon Sowerbutts, Dennis Reinhardt, Matthieu Bussière, Baptiste Meunier and Justine Pedrono

Large amounts of capital flow across borders. But these can be destabilising. So can recipient countries employ prudential policies to offset monetary policy changes in centre countries? And does it matter where sending banks are located? Our findings suggest it does. Our case study of French banks operating in London – part of a broader international initiative – suggests prudential policies have a much bigger offsetting effect on French banks’ lending out of the UK’s financial centre than on their lending out of headquarters in France. In line with those observations, we uncover evidence of a ‘London Bridge’ in cross-border lending: the way French banks channel funds to the UK is responsive to prudential policies in the rest of the world.

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A fistful of dollars: transmission of global funding shocks to emerging markets

Aakriti Mathur and Shekhar Hari Kumar

Emerging markets (EMs) have become more exposed to the global financial cycle in recent years. Positive liquidity shocks – that is, a loosening of global funding market conditions – have led to exchange rate appreciations, reductions in long-term bond yields, stock market booms, and increased gross capital flows to EMs (Bhattarai et al (2018)). Negative liquidity shocks on the other hand constitute a tightening of financial conditions, reducing lending and real investment (Bruno and Shin (2015) and Avdjiev et al (2018)).

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How does international capital flow?

Michael Kumhof, Phurichai Rungcharoenkitkul and Andrej Sokol

Understanding gross capital flows is crucial for both macroeconomic and financial stability policy. However, theory is lagging behind empirical work, as much of the literature continues to rely on net capital flow models developed many decades ago. Missing from these models is an explicit tracking of the financial records underlying all goods and asset purchases, namely gross balance sheet positions, which in turn requires modelling the principal medium of exchange, bank deposits. Our new model features gross capital flows and offers a fresh perspective on important policy debates, such as the role of current accounts as indicators of financial fragility, the nature of the global saving glut, Triffin’s current account dilemma, and the synchronisation of gross capital inflows and outflows.

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