Beyond emissions: the interplay of macroprudential regulation and climate policy

Francesca Diluiso, Barbara Annicchiarico and Marco Carli

While climate change is often seen as a long-term concern, climate mitigation policies can have different short-term effects, since they affect the transmission mechanism of conventional macroeconomic shocks. In a new working paper, we show that cap-and-trade schemes lead to lower volatility in GDP and financial variables, and result in reduced welfare costs of the business cycle, when compared to the more widely known carbon taxes. As we find that these welfare differences are primarily driven by distortions in financial markets, we argue that countercyclical macroprudential regulation, even without any green-biased component, can effectively align the welfare performance of these policies and mitigate their short-run costs.

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Unifying monetary and macroprudential policy

Julia Giese, Michael McLeay, David Aikman and Sujit Kapadia

Central banks have been using a range of monetary policy and macroprudential tools to maintain monetary and financial stability. But when should monetary versus macroprudential tools be used and how should they be combined? Our recent paper develops a macroeconomic model to answer these questions. We find that two instruments are better than one. Used alone, interest rates can control inflation, but are ineffective for financial stability. Policymakers can do better by also deploying the countercyclical capital buffer, a tool that varies the amount of additional capital banks must set aside. The appropriate combination of tools can vary: both should tighten to counter a joint expansion of credit and activity, but move in opposite directions during an exuberance-driven credit boom.

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Profit margins and firm price growth: evidence from the Decision Maker Panel

Ivan Yotzov, Philip Bunn, Nicholas Bloom, Paul Mizen and Gregory Thwaites

Inflation in 2023 remains elevated across many advanced economies. Existing studies have considered the contribution of profits to persistently high inflation in the US, euro area and UK. To add to this debate, we recently asked firms in the Decision Maker Panel about their profit margins over the past year and their expectations for the year ahead. This post summarises the key findings from these new questions, and links them to recent trends in prices. Firms reported a squeeze in profit margins over the past year, on average, but they expect to rebuild margins over the next year. Firms expecting to increase margins also expect slightly higher price growth, suggesting that margin rebuilding could make some contribution to inflation persistence.

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Decoding the market for inflation risk

Saleem Bahaj, Robert Czech, Sitong Ding and Ricardo Reis

Few topics captivate our attention like the enigma of inflation. Understanding where the market thinks inflation is headed is crucial for policymakers, investors, and anyone who wants to keep their financial ducks in a row. And that’s where inflation swaps come into play. They are like the crystal ball of inflation expectations, allowing traders to hedge against inflation risk and giving us a peek into the minds of market participants. In a recent paper, we delve into this thriving market to uncover the who, what, and why behind the prices of these swaps to shed light on the dynamics of inflation expectations.

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Profits in a time of inflation: some insights from recent and past energy shocks in the UK

Sophie Piton, Ivan Yotzov and Ed Manuel

How have profits behaved in this context of sustained level of inflation? In part, the answer depends on how ‘profits’ are defined. Some broad measures suggest increasing profits, but conflate market and non-market sector dynamics and omit important corporate costs. We construct an alternative measure of corporate profits to capture UK firm earnings in excess of all production costs. This measure has been declining since the start of 2022, consistent with evidence from historical energy shocks. This decline has not been uniform across firms, however: firms with higher market power have been better able to increase their margins; others have experienced large declines.

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How do firms pass energy and food costs through the supply chain

Hela Mrabet and Jack Page

The rise in commodity prices after Russia’s invasion of Ukraine had a direct and noticeable impact on consumers’ bills for energy and food. But firms also felt the brunt of higher costs. How did firms pass on these cost shocks through the supply chain and all the way onto consumer prices? How much and how quickly can firms pass through such large cost shocks? In this blog post, we combine information from Supply-Use tables with a rich industry-level data set on input and output price indices to shed light on these questions.

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Shining light on ‘shadow credit’ – what is Buy-Now-Pay-Later and who uses it?

Gerry Gunner and James Waddell

Buy-Now-Pay-Later (BNPL) is a relatively new form of consumer credit that you might have noticed as a payment option when shopping online or in person. However, there is little analysis in the public domain about who is using BNPL credit in the UK and its contribution to total household debt. We have used the Bank’s NMG Consulting survey to reveal that BNPL borrowers are typically younger adults and renters, and are more likely to report signs of financial distress.

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Forecasting near-term trends in the labour market

Harvey Daniell and Andre Moreira

The latest developments in the labour market are often central to monetary policy decisions. We outline a framework for mapping labour market indicators to near-term employment and pay growth, drawing on established insights from the ‘nowcasting’ literature. The key benefits of our approach are: the ability to map a range of ‘soft’ and ‘hard’ indicators of different frequencies to quarterly official data; the empirical determination of how much weight to place on each indicator; and the ability to shift those weights flexibly as more data become available. This framework beats simple benchmark models in our labour market application.

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A quick dive into SME finance

Kim Nyamushonongora and Oscar Spencer

99.9% of UK businesses are small and medium-sized enterprises (SMEs), employing 61% of the UK population. Yet, we know so much more about large businesses, how they function and particularly how they finance themselves. SMEs have been referred to as the backbone of economies around the world. Therefore, SME’s access to finance is systemically important. Using the SME Finance Monitor, a cross-sectional survey by BVA BDRC on 4,500 SMEs each quarter, we dive into how many SMEs use finance, what finance types they used prior to Covid and during Covid, what characteristics make them more likely to use finance and other relevant questions around SME financing. SMEs are defined as having 249 or less employees.

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Fuelling the tail: inflation- and GDP-at-Risk with oil-supply shocks

Marco Garofalo, Simon Lloyd and Edward Manuel

The economic consequences of the Russia-Ukraine war have brought the importance of sharp changes in commodity prices, such as oil, to centre stage. While many have focused on understanding the impact of these developments on the central projection for the macroeconomic outlook, this post investigates the balance of risks arising from oil-supply shocks, asking: could these lead to more severe or persistent changes in output growth and inflation, in rare events? Through the lens of a simple statistical model of Inflation- and GDP-at-Risk, we quantify the macroeconomic risks to inflation and GDP growth associated with (exogenous) changes in oil supply, showing that these shocks have more pronounced effects on the upper tail of the inflation distribution than at the centre.

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