Diffraction through debt: the cash-flow effect of monetary policy

Fergus Cumming.

As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009. Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others. Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009. In this article I explore one element of the monetary transmission mechanism that works through cash-flow effects associated with the mortgage market, and show that it can vary across both time and space.

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The whys and wherefores of short-time work: evidence from 20 countries

Reamonn Lydon, Thomas Mathae and Stephen Millard

Short-time work (STW) schemes are an important fiscal stabiliser in many countries. In the Great Recession, 25 out of 33 OECD countries used short-time work schemes (Balleer et al. 2016). STW schemes aim to preserve employment in firms temporarily experiencing weak demand. This is achieved by providing subsidies to firms to reduce number of hours worked by each employee, instead of reducing the number of workers. As well as being paid for actual hours worked, the subsidy is used to pay workers for hours not worked – albeit not completely compensating the loss of income due to reduced hours. In most countries, the bulk of the subsidy is paid by the state, although companies can also contribute.

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What’s in the News? Text-Based Confidence Indices and Growth Forecasts

Arthur Turrell, Nikoleta Anesti and Silvia Miranda-Agrippino.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth.

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How do firms grow as they age?

Marko Melolinna and Patrick Schneider.

Firm age is a main determinant of firm growth and survival. For example, older firms are likely to be larger and grow more slowly than younger ones (see Audretsch & Mata, 1995; Coad et al, 2013). They are also more likely to survive (see Audretsch & Mahmood, 1995, Manjón-Antolín & Arauzo-Carod, 2008). This is why, in this blog post, we look at how firms’ lifecycles – firms being born, aging and dying – are linked to how firms grow. The results show that, as they age, firms in the United Kingdom grow mainly by employing more people, rather than by generating more turnover per employee. And while firms are on average less likely to die the older they get, the cohort of firms that were born since the financial crisis are more resilient than older firms.

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What goes up must come down: modelling the mortgage cycle

Kristina Bluwstein, Michal Brzoza-Brzezina, Paolo Gelain and Marcin Kolasa.

Mortgages matter. For the individual, borrowing to buy a house can be the biggest debt decision of a lifetime. For the economy, mortgages make up a large fraction of total debt and are a main driver of the financial cycle. Mortgage debt exceeds 80% of UK household debt (see Figure 1), so it is important to understand mortgage market trends, how they link to the macroeconomy and the implications for monetary policy. This post uses a novel model to do just that. In particular, it introduces a rich description of the housing sector into an otherwise standard ‘DSGE’ Model. It focusses on the role of fixed rate mortgages, the mortgage cycle, and how they affect monetary policy transmission.

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Look abroad! Global financial conditions and risks to domestic growth

Fernando Eguren-Martin and Andrej Sokol

What’s the relationship between financial conditions and risks to growth in an economy? And, in a world of highly integrated financial markets, to what extent are these “local” risks rather than reflections of global developments? In this post we offer some tentative answers. Financial conditions, measured across a broad range of asset classes and countries, display an important common component reflecting global developments. Loose financial conditions today increase the likelihood of a growth boom over the following few quarters, but when global financial conditions are loose, they increase the chances of a sharp contraction further ahead, highlighting some of the challenges of managing risks to growth across time from a policy maker’s perspective.

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A question of interest: Is UK household debt unsustainable?

Lewis Kirkham and Stephen Burgess.

UK household debt is high relative to income. But is it “unsustainable”? Some commentators say “it is”; others say “there is no reason to worry”. To investigate, we build a simple model of the economic relationships between household debt, house prices and real interest rates which we believe must hold in the long run. In our model there is no single threshold beyond which debt suddenly becomes unsustainable, but we argue that household debt should be broadly sustainable under any rise in real interest rates of up to about 2 percentage points (pp) from current levels. We also show that falling real interest rates may have contributed around 20-25pp to the rise in the household debt-to-GDP ratio since the 1980s.

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Montagu Norman: The View from St Clere

Barry Eichengreen

Last May, the Bank organised an economic history workshop at the St Clere Estate, home of former governor Montagu Norman. In this guest post, one of the speakers, Barry Eichengreen from the University of California Berkeley, looks back at Montagu Norman’s time as governor.

Montagu Norman’s aura is palpable at St. Clere. It is said that Norman spent many of his weekends and holidays at his estate in Kent, overseeing improvements and admiring the vistas. His legacy is, if anything, even more prominent at the Bank of England. Norman supervised the design of the present Bank building. His portrait, along with those of the other members of his Court, was displayed on the first-floor landing in the Bank’s main atrium; he is only a handful of governors so honored. The Bank’s recent St. Clere workshop thus provided an opportunity to ponder some of the enduring themes and legacies of Norman’s quarter-century as governor.

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Could knowledge about Central banks impact households’ expectations?

Emma Rockall

Should central banks care if people understand them? Whereas once Alan Greenspan famously declared: “If I seem unduly clear to you, you must have misunderstood what I said”, central bankers now dedicate considerable time and thought to transparency and communications. While transparency initiatives have value in their own right in improving accountability, results from the Bank’s Inflation Attitudes Survey suggest that they could have potentially far-reaching effects on the economy through their impact on households’ expectations. If they improve households’ knowledge of central banks, they may produce inflation expectations that are more stable and closer to the inflation target in the medium term – that is, ‘better-anchored’ expectations.

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Low-Carbon Macro

Carsten Jung, Theresa Löber, Anina Thiel and Thomas Viegas

Governments have pledged to meet the Paris Target of restricting global temperature rises to ‘well below’ 2˚C. But reducing CO2 emissions and other greenhouse gases means reallocating resources away from high-carbon towards low-carbon activities. That reallocation could be considerable: fossil fuels account for more than 10% of world trade and around 10% of global investment. In this post, we consider the macroeconomic effects of the transition to a low-carbon economy and how it might vary across countries. While much of the discussion has focussed on the hit to economic activity and the potential for job losses in higher-carbon sectors, we highlight that the transition also offers opportunities. And the overall impact depends crucially on when and how the transition takes place.

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