James Hurley, Sudipto Karmakar, Elena Markoska, Eryk Walczak and Danny Walker
This post is the second of a series of posts about the Covid-19 pandemic and its impact on business activity.
Covid-19 led to a sharp reduction in economic activity in the UK. As the shock was playing out, small and medium-sized businesses (SMEs) were expected to be more exposed than larger businesses. But until now, we have not had the data to analyse the impact on SMEs. In a recent Staff Working Paper we use a new data set containing monthly information on the current accounts of two million UK SMEs. We show that the average SME saw a very large drop in turnover growth and that the crisis played out very differently for different types of SMEs. The youngest SMEs in consumer-facing sectors in Scotland and London were hit hardest.
The Global Financial Crisis in 2008 caused a significant and persistent increase in unemployment rates across major advanced economies. The worsening in labour market conditions increased uncertainty about job prospects, which potentially gave rise to precautionary savings, putting further downward pressure on real economic activity and prices. Moreover, in response to the severe drop in demand, central banks worldwide cut short-term nominal interest rates, which rapidly approached the zero lower bound (ZLB), where they remained for a prolonged time. In a recent paper, we show that committing to keep the interest rate at zero longer than implied by current macroeconomic conditions is particularly effective at easing contractions in demand in the presence of countercyclical unemployment risk and low interest rates.
The Covid pandemic has led to a large enforced shift towards working from home (WFH) as a result of ‘stay-at-home’ policies in many countries. This led to a resurgence in interest in, and new reignited discussion about, the consequences of greater WFH. In this briefing we review the literature on the impact of WFH on productivity. Across a very diverse literature the key lessons are: impacts depend on the nature of tasks, the share of WFH matters, and there is big difference between enforced versus voluntary WFH. And the caveats are important too: cost savings at the firm level don’t automatically translate into economy-wide productivity gains and evidence on long-run effects remains very scarce.
‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower through forbearance measures such as repayment holidays and temporary interest-only loans. The phrase was first coined for Japan in the late 1990s, but more recently several authors have documented that zombie lending to European firms has been widespread following the sovereign debt crisis (see Acharya et al (2019), Adalet McGowan et al (2018), Banerjee and Hofmann (2020), Blattner et al (2018) and Schivardi et al (2017)). In a recent paper, I examine whether these lending practices contributed to the subsequent low output experienced by the euro area. My findings suggest that zombie lending had negative consequences for output, investment and productivity in the euro area over the period 2011 to 2014.
In the wake of the global financial crisis in 2008, nominal interest rates in the US and other advanced economies have approached the effective lower bound (ELB). This fact has motivated new research to understand, both theoretically and empirically, the impact of monetary policies when the nominal policy rate is at the ELB. In a new paper, we show that accounting for balance sheet policies (QE) can ease the constraints imposed by the ELB on monetary policy and resolve several paradoxical results arising in canonical New Keynesian models at the ELB. The ‘paradox of flexibility’, the ‘paradox of toil’ and the puzzle of excessively large fiscal multipliers are all resolved when QE is added to the model as policy tool.
Better communications, enhanced transport links, integration agreements between governments, and other factors have all helped increase global economic interconnectedness over the past few decades. Yet, comparing a state-of-the-art gravity model for trade versus migration reveals important differences in the evolution of globalization over time on flows of goods versus people. For trade, the boost from free trade agreements declines the farther apart signatories are, but for migration the boost increases with distance between signatories. Further, while both border and distance frictions have declined for trade over time, this is not the case for migration flows.
Are less open economies more resilient to downturns? There is general agreement on the benefits of openness, but its adverse link to volatility is ambiguous. On the one hand, globalisation makes countries less sensitive to domestic disturbances, yet it also makes them more exposed to foreign shocks. In this post, I use local projections (LP) to show that international business cycles since 1870 appear to support a positive effect of openness on the economic resilience of a country, and that we may thus expect the current international slowbalisation trend to worsen future recessions.
How is household consumption affected by borrowing constraints in the mortgage market? In a new paper, we answer this question by studying the UK’s Help to Buy (HTB) program over the period 2014–16. The program facilitated home purchases with only a 5% down payment and resulted in a sharp relaxation of the down-payment constraint. We show that HTB boosted household consumption in addition to stimulating housing market activity. Home purchases increased by 11%, and the increase was driven almost entirely by first-time and young buyers. In addition, household consumption grew by 5% more in parts of the UK more exposed to the program. Relaxing the down payment constraint thus has important macroeconomic effects that extend beyond the housing market.
Ivan Yotzov, Nick Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka and Greg Thwaites
Text data is often raw and unstructured, and yet it is the key means of human communication. Textual analysis techniques are increasingly being used in economic and financial research in a variety of different ways. In this post we apply these techniques to a new setting: the text comments left by respondents to the Decision Maker Panel (DMP) Survey, a UK-wide monthly business survey. Using over 20,000 comments, we show that: (i) these comments are a rich and unexplored data source, (ii) Brexit has been the dominant topic of comments since 2016, (iii) text-based indices match existing uncertainty measures from the DMP at both the aggregate and firm level, and (iii) sentiment among UK firms has been declining since 2016.