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.
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.
relationship between financial conditions and risks to growth in an economy?
And, in a world of highly integrated financial markets, to what extent are
these “local” risks rather than reflections of global developments? In this
post we offer some tentative answers. Financial conditions, measured across a
broad range of asset classes and countries, display an important common
component reflecting global developments. Loose financial conditions today
increase the likelihood of a growth boom over the following few quarters, but
when global financial conditions are loose, they increase the chances of a
sharp contraction further ahead, highlighting some of the challenges of
managing risks to growth across time from a policy maker’s perspective.
UK household debt is high relative to income. But is it “unsustainable”? Some commentators say “it is”; others say “there is no reason to worry”. To investigate, we build a simple model of the economic relationships between household debt, house prices and real interest rates which we believe must hold in the long run. In our model there is no single threshold beyond which debt suddenly becomes unsustainable, but we argue that household debt should be broadly sustainable under any rise in real interest rates of up to about 2 percentage points (pp) from current levels. We also show that falling real interest rates may have contributed around 20-25pp to the rise in the household debt-to-GDP ratio since the 1980s.
Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.
Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.
Should central banks care if people understand them? Whereas once Alan Greenspan famously declared: “If I seem unduly clear to you, you must have misunderstood what I said”, central bankers now dedicate considerable time and thought to transparency and communications. While transparency initiatives have value in their own right in improving accountability, results from the Bank’s Inflation Attitudes Survey suggest that they could have potentially far-reaching effects on the economy through their impact on households’ expectations. If they improve households’ knowledge of central banks, they may produce inflation expectations that are more stable and closer to the inflation target in the medium term – that is, ‘better-anchored’ expectations.
Carsten Jung, Theresa Löber, Anina Thiel and Thomas Viegas
Governments have pledged to meet the Paris Target of restricting global temperature rises to ‘well below’ 2˚C. But reducing CO2 emissions and other greenhouse gases means reallocating resources away from high-carbon towards low-carbon activities. That reallocation could be considerable: fossil fuels account for more than 10% of world trade and around 10% of global investment. In this post, we consider the macroeconomic effects of the transition to a low-carbon economy and how it might vary across countries. While much of the discussion has focussed on the hit to economic activity and the potential for job losses in higher-carbon sectors, we highlight that the transition also offers opportunities. And the overall impact depends crucially on when and how the transition takes place.
Small, young private firms in China have long been struggling to obtain formal bank loans. To bypass financial constraints, these firms have resorted to alternative, less formal financing sources. In this context, Chinese authorities are aiming to develop a more formal, market-based, and better regulated credit sector. In a Staff Working Paper, I argue that carefully designed credit sector reforms are crucial to avoid throwing out the baby with the bath water. Despite the interest rate liberalisation progressively implemented by Chinese authorities, a general crackdown on alternative finance would remain detrimental to the dynamism of small enterprises. Selectively tightening the limits around informal financing could better balance financial stability on the one hand, and welfare and efficiency on the other.
For the global economy, it was the best of times, and then it was the worst of times. Buoyed by very strong growth in emerging markets, the global economy boomed in the mid-2000s. On average, annualised world GDP growth exceeded 5% for the four years leading up to 2007 – a pace of growth that hadn’t been sustained since the early 1970s. But it wasn’t to last. In this post, I illustrate how the failure of Lehman Brothers in September 2008 coincided with the deepest, most synchronised global downturn since World War II. And I describe how after having seen the fallout of the Lehman collapse, macroeconomic forecasters were nevertheless surprised by the magnitude of the ensuing global recession.