Robert Hills, John Hooley, Yevgeniya Korniyenko and Tomasz Wieladek.
When funding conditions became much more difficult in the recent financial crisis, how did UK banks react? Did they adjust their domestic and external lending to different degrees? Did foreign-owned banks behave differently from UK-owned banks, and did it make a difference whether they were a branch or a subsidiary? Did the other features of their balance sheet make a material difference to their lending behaviour? Our research suggests that the answer to all of these questions is “yes”.
Edd Denbee, Carsten Jung and Francesco Paternò.
The global financial safety net (GFSN) is a set of instruments and institutions which act as countries’ insurance for when capital flows suddenly stop or foreign currency markets suddenly freeze. These resources were extremely important during the 2007-08 crisis when investors ran for the exits, threatening the external positions of many advanced and emerging economies. Since then, the GFSN has expanded in size and nature, but was recently described by IMF Managing Director Christine Lagarde as “fragmented and asymmetric”. We agree on the asymmetry – our recent paper finds that some countries have insufficient access to the GFSN. However, we also find that the GFSN is sufficiently resourced for a severe set of shocks, provided the IMF’s current lending capacity is maintained.
Do exchange rate regimes matter for the formation of countries’ external imbalances? Economists have thought so for over sixty years, and policymakers have made countless recommendations based on that presumption. But this had not been tested empirically until very recently, so it remained an opinion rather than a fact. In this post I show that having a flexible exchange rate regime leads to the correction of external imbalances in developing countries, offering some empirical support to a widely held belief. In contrast, this does not seem to be the case for advanced economies.
Ambrogio Cesa-Bianchi, Jean Imbs and Jumana Saleheen.
It is a well-known fact that financial integration has increased dramatically over the past few decades. Has this rise led to higher or lower business cycle synchronization? The answer depends crucially on the source of the shock. In response to common shocks, financial integration tends to lower business cycle synchronization. But in response to a country-specific shock, business cycles are more synchronised between countries that are more ﬁnancially integrated.
The risk of Greece exiting the euro area (Grexit) has unsettled financial markets regularly over recent years. A New Year poll suggested that most Greeks feel that 2016 will see the threat of Grexit return. However, even if the probability of Grexit rises again, that does not necessarily mean that financial markets will respond with similar volatility. Indeed, this post shows that, based on the sensitivity of international asset prices to those in Greece itself, each successive episode of Greek stress has in turn caused less stress abroad.
To measure the sensitivity of global financial markets to Grexit risk I regress euro area, UK and US asset prices on a composite of Greek asset prices. I do this for three different episodes when Greek financial markets exhibited signs of stress and there was also a high volume of news articles on Bloomberg that referred to Grexit risk. For most euro area, UK and US asset prices, their sensitivity to Greek stress declined in each successive episode.
Bob Gilhooly, Gene Kindberg-Hanlon and Dan Wales.
The dramatic fall in the price of oil has had a marked effect on headline inflation across the world. In contrast, measures of core inflation (ex. food & energy) have been more stable suggesting, that once the base effects from oil drop out, headline rates of inflation should bounce back. However, while inflation rates around the world will mechanically pick up in the near-term, it is not clear that global labour markets are strong enough to drive inflation fully back to target.
John Lewis and Selien De Schryder.
Did the dramatic fall in global trade exports in 2008/9 stem from a temporary shock, or did it herald a permanently lower level of trade? The answer has important implications for the UK’s growth prospects. If it was a permanent hit, then the UK’s weak export growth after the crisis is more explicable, but external growth sources have become less fruitful. We find that advanced economies as a whole exhibited a high degree of bouncebackability, since exports recovered to levels consistent with the pre-crisis relationship between output and exports. But this masks considerable variability at the country level, with UK exports in particular recovering by less than expected.
Dennis Reinhardt and Rhiannon Sowerbutts.
We find evidence that certain types of macroprudential regulation are avoided by borrowing from abroad. Borrowing by the non-bank sector from abroad increases after an increase in capital requirement, but not after an increase in lending standards. This is likely to be because of the way that the two regulations are applied and is supportive of strong frameworks for reciprocating capital regulation.
Before the crisis world trade tended to grow around twice as quickly as world GDP, but since 2012 trade growth has simply matched that of GDP. So what explains this weakness? Contrary to some other economists, this post finds no evidence that factors such as slowing growth of supply chains or the expenditure split of demand can explain the weakness relative to GDP. Instead, it is due to the changing composition of global activity: over time a greater share of world activity has been accounted for by countries whose imports grow more slowly relative to GDP. These trends are likely to continue, such that world trade is likely to grow more slowly relative to GDP than in the past.
David Elliott, Chris Jackson, Marek Raczko and Matt Roberts-Sklar.
Oil prices have fallen by more than 50% since mid-2014. For much of this period, financial market measures of both short-term and longer-term inflation expectations appear to have mirrored moves in oil prices, particularly in the US and euro area. But how strong is the relationship between oil prices and financial market inflation expectations, and what should we make of it?