Aggregate labour productivity growth has been low in the UK following the global financial crisis in 2008 (Chart 1). The average annual growth rate has been only 0.7% over the period 2008 to 2019, which is around a third of the growth rate seen during the decade preceding the crisis. There are many ways of analysing the reasons for this weakness, but in this blog post, I concentrate on examining the role that the largest firms in the UK have played in the story. Our analysis covering the past three decades from 1990 to 2017 suggests that firm-specific, or idiosyncratic, shocks to the 100 largest firms had a significant effect on aggregate productivity dynamics in the UK.
How does the transmission of monetary policy depend on the distribution of debt in the economy? In this blog post we argue that interest rate changes are most powerful when a large share of households are financially constrained. That is, when a higher proportion of all borrowers are close to their borrowing limits. Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.
Saleem Bahaj, Angus Foulis, Gabor Pinter and Paolo Surico
Changes in interest rates affect different parts of the economy differently. In this post, building on a recent working paper, we consider how different types of firms respond to interest rate changes. We focus on firm level employment and ask which firms do the most hiring and firing when monetary policy adjusts. For instance, how important is the age of the firm, its balance sheet position or its size in determining the firm level response to interest rates? Furthermore, do these patterns of responses tell us something about how monetary policy affects the economy?
Bruno Albuquerque, Knut Are Aastveit and André Anundsen
Housing supply elasticities – builders’ response to a change in house prices – help explain why house prices differ across location. As housing supply becomes more inelastic, the more rising demand translates to rising prices and the less to additional housebuilding. In a new paper, we use a rich US dataset and novel identification method to show that supply elasticities vary across cities and across time. We find that US housing supply has become less elastic since the crisis, with bigger declines in places where land-use regulation has tightened the most, and in areas that had larger price declines during the crisis. This new lower elasticity means US house prices should be more sensitive to changes in demand than before the crisis.
Andreas Joseph, Christiane Kneer, Neeltje van Horen and Jumana Saleheen
Financial crises affect firm growth not only in the short-run, but even more so in the long-run. Some firms permanently gain while others lose and cash is a crucial asset to have when the credit cycle turns. As we show in a new Staff Working Paper, having cash at hand allows firms to continue to invest during the crisis while industry rivals without cash have to divest. This gives cash-rich firms an important competitive edge that not only benefits them during the crisis but that gives them an advantage that lasts way beyond the crisis years.
Children are expensive. Swings in families’ cash-flow can therefore move the dial on families’ decisions on whether and when to have a baby. For mortgaged families with an adjustable interest rate in 2008, the sharp fall in Bank Rate amounted to a windfall of around £1,000 per quarter in lower mortgage payments. In this post we show that people responded to this cash-flow boost by having more children. In total, we estimate that monetary policy increased the birth rate in the following three years by around 7.5%. That’s around 50,000 extra babies.
Central banks the world over calculate and plot forecast fancharts as a way of illustrating uncertainty. Explaining the details of how this is done in a single blog post is a big ask, but leveraging free software tools means showing how to go about it isn’t. Each necessary step (getting data, building a model, forecasting with it, creating a fanchart) is shown as R code. In this post, a simple data-coherent model (a vector auto-regression or VAR) is used to forecast US GDP growth and inflation and the resulting fanchart plotted, all in a few self-contained chunks of code.
When moving house, people often don’t move too far away. Many will be commuting to the same job or don’t want their kids to move school. But many people move long-distance when they sell one house and buy another.
How sound is the argument that current account balances are driven by demographics? Our multi-country lifecycle model explains 20% of the variation in observed net foreign asset positions among advanced economies through differences in population age structure. These positions should expand further as countries continue to age at varying speeds.
Financial markets provide insightful information about the level of risk in the economy. However, sometimes market participants might be driven more by their perception rather than any fundamental changes in risk. In a recent Staff Working Paper we study the effect of changes in risk perceptions that can lead to a mispricing of risk. We find that when agents over-price risk, banks adjust their bank lending policies, which can lead to depressed investment and output. On the other hand, when agents under-price risk, excessive lending creates a ‘bad’ credit boom that can lead to a severe recession once sentiment is reversed.