Increased working from home (WFH) for public health reasons during the pandemic has spawned a debate about whether this shift might become permanent. In this post, I try to sketch out some of the (macro) economics of a longer-run post-pandemic shift towards more WFH. I argue that: i) on consumption, it won’t affect aggregate expenditure, it will just reallocate it across space and sectors ii) in property markets, effects hinge on supply responses; iii) for output, cost-savings to firms from cutting back office space don’t translate one-for-one into GDP gains.
In 2020 governments around the world responded to Covid-19 (Covid) by introducing lockdown measures that were designed to slow the spread of the virus. Business activity fell materially. But it is difficult to isolate the impact of the local lockdown measures on business activity, given that business activity was affected by other factors such as voluntary social distancing at the same time. In this post we compare UK small and medium enterprises (SMEs) located close to the borders of – but not within – local lockdowns with similar businesses just inside, and conclude that the local lockdown measures causally reduced turnover growth by 8 percentage points relative to businesses outside of the lockdowns, driven by restaurants and non-food retail. Average turnover growth over the period was around -20%, which implies that the lockdowns accounted for only two fifths of the overall drop in business activity at most.
The Bank of England co-organised a ‘History and Policy Making Conference‘ in late 2020. This guest post by Nathan Sussman, Professor of International Economics at the Graduate Institute of Geneva, is based on material included in his conference presentation.
Prior to the Covid-19 (Covid) shock hitting the world economy in March 2020, concerns about US corporate debt sustainability were on the radar of the media and policymakers. Corporates had been accumulating debt at a rapid pace, leading to a record-high debt level of 47% of GDP in 2019. To what extent may the accumulation of debt amplify the ongoing crisis, and delay the US recovery? And what can we learn from past episodes of firm-specific debt booms? In a new paper, I revisit these questions using data for a large panel of US firms from the mid-1980s to just before the pandemic. I find that persistent debt booms led financially constrained firms to cut back on investment, across both capital expenditures and intangible assets.
This post contributes to our occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.
When Britain created the Exchange Equalisation Account (EEA) in 1932, its designers had little sense of the controversy that would ensue. The previous year, Britain had suspended gold convertibility, and the volatile capital flows that followed convinced officials that they needed a tool for managing the exchange rate. The EEA – originally a fund solely for foreign exchange interventions (its remit is broader now) – seemed not only necessary but eminently reasonable. To a world in the throes of depression, however, it looked like a means to weaken sterling and reap a competitive advantage. America responded by establishing the Exchange Stabilization Fund (ESF) in what many viewed as another escalation in the conflict that was tearing the international monetary system apart.
Restrictions on activity to curb the spread of Covid-19 led to a shutdown of specific parts of the economy. These lockdown measures can be thought of as a shock that suddenly decreases the supply of affected sectors, which lowers output and increases their price. Guerrieri et al (2020) propose a theoretical model of ‘Keynesian supply shocks’ where a sectoral supply shock triggers knock-on effects on demand in other sectors which, if strong enough, can lead to a fall in aggregate prices and output – thus resembling an aggregate demand shock. In a recent paper, we provide empirical evidence supporting this hypothesis using pre-Covid data. Our results suggest a different way to look at the Covid crisis and business cycles in general.
The academic literature finds that the build-up of household debt before the 2008 financial crisis is linked to weaker consumption afterwards. But there is wider debate over the mechanisms at play. One strand of literature emphasises debt overhang acting through the level of leverage. Others find it was over-optimism acting through leverage growth. In this post, we revisit our previous analysis on leverage and consumption in the UK using synthetic cohort analysis. The correlation between leverage measures and their link to other macroeconomic variables mean it’s challenging to tease out their effects. Yet we find that whilst both mechanisms played a role, there is evidence that debt overhang linked to a tighter credit constraints was the bigger driver.
There is ample evidence that a monetary policy tightening triggers a decline in consumer price inflation and a simultaneous contraction in investment and consumption (eg Erceg and Levin (2006) and Monacelli (2009)). However, in a standard two-sector New Keynesian model, consumption falls while investment increases in response to a monetary policy tightening. In a new paper, we propose a solution to this problem, known as the ‘comovement puzzle’. Guided by new empirical evidence on the relevance of frictions in credit provision, we show that adding these frictions to the standard model resolves the comovement puzzle. This has important policy implications because the degree of comovement between consumption and investment matters for the effectiveness of monetary policy.
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.