Category Archives: Macroeconomics

Foreign-owned firms and productivity

Sandra Batten and Dena Jacobs

Many governments around the world pursued policies to free up capital flows from the late 1970s to early 1990s with the aim of boosting productivity.  There’s now a debate raging about the costs and benefits of globalisation. While detractors highlight concerns about inequality, supporters of capital liberalisation point to the productivity growth it has fostered. Drawing on a unique UK firm-level dataset that merges data from the ONS business and innovation surveys, we show that foreign-owned companies are more productive than domestically owned firms and that their presence boosts domestic labour productivity. We suggest three reasons why: foreign-owned companies invest more in R&D; they are better managed; and they collaborate with other organisations and promote the diffusion of ideas.

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Filed under Macroeconomics

Car finance: what’s new?

Tim Pike, Phil Eckersley and Alex Golledge

Since our first post, car finance has risen up the agenda of regulators, journalists and policymakers. Here we provide an update on recent developments. Sterling’s depreciation has had little impact on car finance costs: first because pass-through to new car prices has been muted, and second because finance providers have responded by lengthening loan terms and increasing balloon payments rather than upping monthly repayments. Providers are increasingly retailing contracts where consumers have no option to purchase the car at the end.  This avoids some risks associated with voluntary terminations, but it creates new risks around resale value. In sum, the industry continues to accumulate credit risk, predicated on the belief that used car values will remain robust.

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Filed under Financial Stability, Macroeconomics, Uncategorized

Bitesize: Elections, confidence and misery (US edition)

Thomas Viegas and Emil Iordanov

Since Donald Trump was elected to the Oval Office last November, consumer confidence in the US has picked up notably. But is this post-election rise unusual?

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Filed under Economic History, International Economics, Macroeconomics

How will households react to the real income squeeze?

Philip Bunn and Jeremy Rowe

Rising inflation is eroding the spending power of UK households’ incomes.  How will they react to that?  The answer will make a big difference to the economic outlook.  Will they dip into savings and carry on buying the same amount of goods and services, or will they just spend the same and be able to buy less with it?  New survey evidence suggests that households intend to do a bit of both with nominal spending increasing by around half of the rise in prices but real consumption also falling.  But not all households say they will respond in the same way: households with debts and limited savings to fall back on are less likely to be able to increase spending.
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Filed under Macroeconomics, Monetary Policy

Bitesize: How trendy are retail sales?

Matthew Swannell

Since the turn of the year UK retail sales data have been grabbing headlines. Sharp contractions have been attributed to rising prices. That is no doubt part of the argument. But is there more to it?

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Central Bank Balance Sheets: Past, Present and Future

James Barker, David Bholat and Ryland Thomas.

Central bank balance sheets swelled in size in response to the financial crisis of 2007-09. In this blog we discuss what makes them different from the balance sheets of other institutions, how they’ve been used in the past, and how they might evolve in the future as means to implement novel policies – including the revolutionary possibility that a central bank could issue its own digital currency.
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Filed under Banking, Economic History, Macroeconomics, Monetary Policy

The Forward Guidance Paradox

Alex Haberis, Richard Harrison and Matt Waldron.

In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today.   This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise.  We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place.   As a result, forward guidance promises in these models are much less powerful than standard analysis suggests.

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Filed under Macroeconomics, Monetary Policy, New Methodologies

Imports and the composition of expenditure

Alex Tuckett

A fall in the real exchange rate can increase demand for domestic output in two main ways. The volume of exports – which become cheaper – is boosted. And goods and services that were previously imported can instead be supplied by domestic producers, which become more competitive as the price of imports rises. Economists call the second effect ‘import substitution’. Using data from Supply-Use tables can help us better understand the process of import substitution, in particular by examining how the composition of expenditure has influenced imports. Doing so shows that the import substitution effect of the 2008-09 depreciation was partly masked by other, co-incident factors.

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Filed under International Economics, Macroeconomics

Do core and transitory volatilities matter for the economy?

Jeremy Chiu, Richard Harris and Evarist Stoja

Financial market shocks: do they matter for the economy?

Financial markets are intrinsically volatile, constantly fluctuating in response to a wide variety of news. Often, these shocks to volatility are short-lived, perhaps reflecting a one-off adjustment in asset prices or the market’s overreaction to news, and have a tendency to dissipate rapidly. But sometimes they lead to a sustained increase in market volatility, reflecting a deeper uncertainty over the future macroeconomy that can take time to resolve itself.  Indeed, a considerable body of empirical evidence suggests that financial market volatility is made up of two components: a slowly varying ‘core’ component and a ‘transitory’ component that dissipates quickly. We develop a way to identify each type and estimate how they affect the broader economy.

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Filed under Financial Markets, Macroeconomics, Uncategorized

Does productivity drive wages? Evidence from sectoral data

Alex Tuckett

Since 2008, aggregate productivity performance in the UK has been substantially worse than in the preceding eight years. Over the same period, aggregate real wage growth has also been significantly lower – it has averaged -0.4% per annum from 2009-16, compared with 2.3% per annum from 2000-08. The MPC, and others, have drawn a link between these two phenomena, arguing that low productivity growth has been a major cause – if not the major cause – of weak wage growth. The logic is simple – if workers produce less output for firms, then in a competitive market firms will only be willing to employ them at a lower wage.

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Filed under Macroeconomics