Bitesize: The travels of Montagu Norman

Mike Anson, Georgina Green and Ryan Lovelock

Montagu Norman was the Bank of England’s longest serving Governor (1920-44) and one of the leading players on the interwar international financial stage. He was a controversial and enigmatic character who pioneered co-operation between central banks.

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All bark but no bite? What does the yield curve tell us about growth?

Carlo Favero, Sebastian Vismara and Iryna Kaminska

The slope of the yield curve has decreased in the US and the UK over the last few years (Chart 1). This development is attracting significant attention, because the yield curve slope (i.e. the difference between longer term government bond yields and shorter term government bond yields) is a popular business cycle indicator, and a fall of longer term yields below shorter term yields (i.e. an ‘inversion’ of the yield curve) has historically been considered as a powerful signal of recessions, particularly in the US.

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Opening the machine learning black box

Andreas Joseph

Machine learning models are at the forefront of current advances in artificial intelligence (AI) and automation. However, they are routinely, and rightly, criticised for being black boxes. In this post, I present a novel approach to evaluate machine learning models similar to a linear regression – one of the most transparent and widely used modelling techniques. The framework rests on an analogy between game theory and statistical models. A machine learning model is rewritten as a regression model using its Shapley values, a payoff concept for cooperative games. The model output can then be conveniently communicated, eg using a standard regression table. This strengthens the case for the use of machine learning to inform decisions where accuracy and transparency are crucial.

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Shocks and labour cost adjustment

Thomas Mathae, Stephen Millard, Tairi Room, Ladislav Wintr and Robert Wyszynski

How do firms respond to shocks?  Do they first change the hours worked by their employees?  Or the number of employees?  Or wages?  Or a combination?  Does the shock matter?  And the firm’s country?  One way of answering these questions is to ask the managers within firms themselves.  And this is exactly what the Wage Dynamics Network did, surveying firms in 25 European countries. Our research used this survey to answer these questions.  We found that in response to negative shocks firms were most likely to reduce employment, then wages and then hours, regardless of the source of the shock.  But, in response to positive shocks, firms were most likely to raise wages, then employment and then hours.

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The Missing Link: Monetary Policy and The Labor Share

Cristiano Cantore, Filippo Ferroni and Miguel León-Ledesma.

How do monetary policy shocks affect the distribution of income between workers and owners of capital? Do workers benefit relatively more when policy changes? Tackling this question empirically requires technical econometric methods, but we are able to show that the share of output allocated to wages (the labor share) temporarily increases following a positive shock to the interest rate. This means that the slice of the pie enjoyed by those whose earnings are mostly made up of wages increases at the expense of profits and capital income. Strikingly, this redistribution channel that shows up in the data runs precisely in the opposite direction to the predictions of standard New Keynesian models commonly used to study the effects of monetary policy.

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Diffraction through debt: the cash-flow effect of monetary policy

Fergus Cumming.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009. Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others. Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009. In this article I explore one element of the monetary transmission mechanism that works through cash-flow effects associated with the mortgage market, and show that it can vary across both time and space.

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The whys and wherefores of short-time work: evidence from 20 countries

Reamonn Lydon, Thomas Mathae and Stephen Millard

Short-time work (STW) schemes are an important fiscal stabiliser in many countries.  In the Great Recession, 25 out of 33 OECD countries used short-time work schemes (Balleer et al. 2016).  STW schemes aim to preserve employment in firms temporarily experiencing weak demand. This is achieved by providing subsidies to firms to reduce number of hours worked by each employee, instead of reducing the number of workers. As well as being paid for actual hours worked, the subsidy is used to pay workers for hours not worked – albeit not completely compensating the loss of income due to reduced hours. In most countries, the bulk of the subsidy is paid by the state, although companies can also contribute.

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What’s in the News? Text-Based Confidence Indices and Growth Forecasts

Arthur Turrell, Nikoleta Anesti and Silvia Miranda-Agrippino.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth.

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How do firms grow as they age?

Marko Melolinna and Patrick Schneider.

Firm age is a main determinant of firm growth and survival. For example, older firms are likely to be larger and grow more slowly than younger ones (see Audretsch & Mata, 1995; Coad et al, 2013). They are also more likely to survive (see Audretsch & Mahmood, 1995, Manjón-Antolín & Arauzo-Carod, 2008). This is why, in this blog post, we look at how firms’ lifecycles – firms being born, aging and dying – are linked to how firms grow. The results show that, as they age, firms in the United Kingdom grow mainly by employing more people, rather than by generating more turnover per employee. And while firms are on average less likely to die the older they get, the cohort of firms that were born since the financial crisis are more resilient than older firms.

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What goes up must come down: modelling the mortgage cycle

Kristina Bluwstein, Michal Brzoza-Brzezina, Paolo Gelain and Marcin Kolasa.

Mortgages matter. For the individual, borrowing to buy a house can be the biggest debt decision of a lifetime. For the economy, mortgages make up a large fraction of total debt and are a main driver of the financial cycle. Mortgage debt exceeds 80% of UK household debt (see Figure 1), so it is important to understand mortgage market trends, how they link to the macroeconomy and the implications for monetary policy. This post uses a novel model to do just that. In particular, it introduces a rich description of the housing sector into an otherwise standard ‘DSGE’ Model. It focusses on the role of fixed rate mortgages, the mortgage cycle, and how they affect monetary policy transmission.

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