Category: International Economics

Did supply constraints tilt the Phillips Curve?

Ambrogio Cesa-Bianchi, Edward 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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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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