Monetary policy and happiness

Philip Bunn and Alice Pugh

It has been well established that macroeconomic outcomes, such as recessions and unemployment, can have important impacts on households’ well-being. So it follows that monetary policy decisions can affect happiness too. In a recent working paper we use a novel approach to assess how the unprecedented loosening in monetary policy in response to the 2008 global financial crisis affected the well-being of UK households. The framework we use could be used to assess the welfare implications of other monetary policy responses, including to the spread of Covid-19 during 2020.

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Global financial cycles since 1880

Galina Potjagailo and Maik H. Wolters

Global financial cycles: a long-term affair

Today’s financial system is global: credit and several financial asset classes show booms and busts across countries, sometimes with severe repercussions to the global economy. Yet it is debated to what extent common dynamics rather than domestic cycles lie behind financial fluctuations and whether the impact of global drivers is growing. In a recent Staff Working Paper, we observe various global financial cycles going as far back as the 19th century. We find that a volatile global equity price cycle is nowadays the main driver of stock prices across advanced economies. Global cycles in credit and house prices have become larger and longer over the last 30 years, having gained relevance in economies that are more financially open and developed.

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Consumption in the time of a pandemic: tracking UK consumption in real time

Sinem Hacioglu Hoke, Diego Kaenzig and Paolo Surico

The response to the Covid-19 pandemic has included closure of retail outlets and social distancing. How large was the resulting consumption fall in the UK? In a new paper, we try to answer this question using a transaction-level dataset of over 8 million individual transactions. This gives a near-real time read on consumer spending, without the publication lags associated with national accounts consumption data. We find that the bulk of the fall had occurred before legally mandated lockdown started. The largest declines occurred in retail, restaurants and transport, but spending on some items such as online shopping, alcohol and tobacco rose. There is substantial variation in change in consumption across age, income group, housing tenure and local authority.

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Global real rates, 1311–2018

Paul Schmelzing

Paul Schmelzing is an academic visitor to the Bank of England, currently based at Yale University. In this guest post, he summarises his research on the differential between real interest rates and real growth rates over the past seven centuries…

There is a lively academic and policy debate about whether a build-up of excess savings in advanced economies has created a drag on long-term interest rates. In a recent paper, I provide new context to these discussions. I construct a long-run advanced economy (DM) public real interest rate series geographically covering 78% of DM GDP since the 14th century. Using this series, I argue that current interest rate trends cannot be rationalized in a “secular stagnation” framework that has been “manifest for two decades”. Rather, historical data illustrates that advanced economy real rates have steadily declined for more than five centuries, despite important reversal periods. This post draws from long-run economic history to provide additional insights concerning the current interest rate environment.

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UK productivity growth from 2008 to 2018: weakness was structural, not cyclical

Marko Melolinna

Monetary policy makers need to know whether the economy is operating above or below its supply capacity. If the economy is operating above its supply capacity, inflation is likely to rise, and vice versa. A crucial component of supply capacity is the labour productivity trend but we cannot observe this directly. We have to estimate it. Thankfully, there are ways of splitting observed macroeconomic time series into estimated trend and cyclical components. Using a variety of methods on UK data, I find that UK productivity growth over the period 1991 to 2018 has been structurally, rather than cyclically, weak since the financial crisis. And, UK trend productivity has been strongly correlated with trend productivity in other advanced economies.

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Monetary policy and US housing expansions: what can we expect for the post-COVID-19 housing recovery?

Bruno Albuquerque, Martin Iseringhausen and Frédéric Opitz

The fall in aggregate demand due to the COVID-19 shock has brought the eight-year long US housing market expansion to a halt. At the same time, the Federal Reserve and the US Government have deployed significant resources to support households and businesses. These actions should help weather the ongoing crisis and lay the seeds for the next recovery. It is, however, highly uncertain how the post-COVID-19 housing recovery will look. Using a time-varying parameter (TVP) model on US aggregate data, our results suggest that the next housing recovery may exhibit similar features to the 2012-19 expansion: a sluggish response of housebuilding to rising demand, but a strong response of house prices.

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Covid-19 Briefing: International Trade and Supply Chains

Rebecca Freeman and Rana Sajedi

The Covid-19 pandemic has led to both a decline in economic activity that has been propagated across borders through global supply networks, and a rise in barriers to trade between countries. This has led to a rapidly emerging literature seeking to understand the effects of the pandemic on trade. This post surveys some of the key contributions of that literature. Key messages from early papers are that: i) The shock is a hit to both demand and supply, and is thus deeper than what was experienced during the 2008/09 Great Trade Collapse; ii) Global value chains have amplified cross-country spillovers; iii) When supply chains are highly integrated, protectionist measures can disrupt production of medical equipment and supplies; and, hence, iv) Keeping international trade open during the crisis can help to limit the economic cost of the pandemic and foster global growth during the recovery.

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Covid-19 Briefing: Corporate Balance Sheets

Neeltje van Horen

Faced with unprecedented declines in corporate revenue, the Covid-19 shock represents a loss of cash flow of indeterminate duration for many firms. It is too early to tell how exactly firms will be affected by this crisis and how scarring it will be, but the crisis will likely have a significant impact on most corporates. This post reviews the literature on factors affecting firms’ ability to withstand the Covid-19 shock and what large corporates did to shore up their finances.

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How important are large firms for aggregate productivity growth in the UK?

Marko Melolinna

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.

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