Category Archives: Macroeconomics

Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals

Paul Schmelzing, Harvard University.

bu-guest-post2Paul Schmelzing is a visiting scholar at the Bank from Harvard University, where he concentrates on 20th century financial history. In this guest post, he looks at the current bond market through the lens of nearly 800 years of economic history.

The economist Eugen von Böhm-Bawerk once opined that “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. But as rates reached their lowest level ever in 2016, investors rather worried about the “biggest bond market bubble in history” coming to a violent end. The sharp sell-off in global bonds following the US election seems to confirm their fears. Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded. History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 “bond massacre”.

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Filed under Economic History, Guest Post, Macroeconomics

The Nightmare before Christmas: Financial crises go global in 1857

Tobias Neumann.

A railway boom in America’s Midwest goes spectacularly bust.  Sixty-two of New York’s commercial banks close – out of sixty-three. Meanwhile in Britain, a decade gilt-edged by gold discoveries in Australia and fuelled by the Crimean War was beginning to lose its lustre.  Thus the scene was set for the first global financial crisis shaking markets in New York, London, Paris and across the world.  A crisis so severe it forced the Bank of England to “break the law” to survive.

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Filed under Banking, Economic History, Financial Stability, Macroeconomics

The world trade slowdown (redux)

Gene Kindberg-Hanlon and David Young.

The volume of world trade is now 17% below where it would be had it grown at pre-crisis trend after 2011.  This post argues that most of this gap can be explained by weakness in world GDP, but stalling expansion in global value chains (GVCs) is playing an increasingly important role.  We also argue that this shortfall can’t be explained by shifts in the geographical or the expenditure split of global GDP growth. While world trade grew twice as quickly as world GDP pre-crisis, it is likely to grow at about the same rate as world GDP in the future.  This matters: weak trade could explain half of the 1pp fall in annual global productivity growth since the crisis.

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Filed under International Economics, Macroeconomics

Designing stress test scenarios – developing doomsday

Colm Aodh Manning.

For the past three years, the Bank of England (the Bank) has carried out an annual ‘stress test’ of the UK’s largest banks. To do this, it designed a narrative-based stress scenario in 2014 and 2015. The goal was to determine the banking sector’s resilience to pertinent threats, like recessions or a sharp fall in house prices. However, changing scenarios each year makes it difficult to judge how banks’ overall vulnerability to risks changes over time. Since the crisis we learned that risks build in the good times and capital in the banking system should rise to reflect this. This is why – beginning this year – the Bank has also run an Annual Cyclical Scenario (ACS).

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Filed under Banking, Financial Stability, Macroeconomics

The U Word: What can text analytics tell us about how far uncertainty has risen during 2016?

Alastair Cunningham, David Bradnum and Alastair Firrell.

Uncertainty is a hot topic for economists at the moment.  Have business leaders become more uncertain as a result of the EU referendum?  If so, has that uncertainty had any effect on their plans?   The Bank’s analysts look at lots of measures of economic uncertainty, from complex financial market metrics to how often newspaper articles mention it.  But few of those measures are sourced directly from the trading businesses up and down the country whose investment and employment plans affect the UK economy.  This blog reports on recent efforts to draw out what the Bank’s wide network of business contacts are telling us about uncertainty – comparing what we’re hearing now to trends seen in recent years.

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Filed under Macroeconomics, New Methodologies

Bitesize: America is not always like the rest of the world

John Lewis.

Macroeconomists like to use US data to test and develop theories- the coverage is generally very good, and the world’s largest economy is an obvious benchmark.  But what if the US happens to be very atypical in some respects?  For example the evolution of the income distribution…

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Bitesize: The divergence of house prices and rents in Prime London

Philippe Bracke and Alice Pugh.

Economic theory suggests that property prices and rents should move together: rents represent the flow of housing services gained from living in a property, and prices are determined by the discounted value of all future rents.

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Filed under Macroeconomics

There are two productivity puzzles

Patrick Schneider.

Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.

In this post I discuss:

  1. what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;
  2. how I think of it as actually two puzzles: one in the level and the other in the growth rate; and
  3. why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.

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Filed under Macroeconomics, New Methodologies

Bitesize: Has the FOMC increased its focus on foreign risks?

Dan Wales and Emil Iordanov.

Have FOMC discussions changed since the end of 2015? Are the committee more concerned about international risks now?

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Filed under Bitesize, International Economics, Macroeconomics, Monetary Policy

Macroprudential Regulation: Two birds with one stone?

Roy Zilberman and William Tayler.

bu-guest-post2Last year the Bank organised a research competition to coincide with the launch of the One Bank Research Agenda.  In this guest post, the authors of the winning paper in that competition, Roy Zilberman and William Tayler from Lancaster Business School, summarise their work on optimal macroprudential policy.

Can macroprudential regulation go beyond its remit of financial stability and also contain inflation and output fluctuations? We think it can and argue that macroprudential regulation, in the form of countercyclical bank capital requirements, is a superior instrument to both conventional and financially-augmented Taylor (1993) monetary policy rules. This is especially true in responding to financial shocks that drive output and inflation in opposite directions, as also observed at the start of the recent financial crisis (see Gilchrist, Schoenle, Sim and Zakrajsek (2016)). This helps to effectively shield the real economy without the need for a monetary policy interest rate intervention. Put differently, a well-designed simple and implementable bank capital rule can achieve optimal policy associated with zero welfare losses.

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Filed under Financial Stability, Guest Post, Macroeconomics, Macroprudential Regulation