From the introduction of the Euro up to the 2008 global financial crisis, macroeconomic imbalances widened among Member States. These imbalances took the form of strong differences in the dynamics of unit labour costs, which increased much faster in ‘peripheral’ economies than in ‘core’ countries. At first, these imbalances were interpreted as reflecting a catch-up and convergence process within the Euro Area – and were supposed to fall as countries converged. But, more recently economists and policymakers have challenged this view, suggesting that imbalances reflected a broader competitiveness problem in the ‘periphery’ compared to the ‘core’ countries. This post, based on a recent Staff Working Paper, revisits the effect of economic integration on macroeconomic imbalances.
Much has been written on the global decline of the corporate labour share (defined as the share of corporate value added going to wages, salaries and benefits). The IMF and OECD worry about this trend, linking it to decreasing wages and rising inequality. And economists are hard at work looking for an explanation: prominent hypotheses range from automation and ‘superstar’ firms to offshoring. But is there really a global decline in the non-housing/business labour share? Not if you properly exclude housing income and account for self-employment, as described in a recent Staff Working Paper. Adjusting for housing and self-employment, labour shares have remained stable across most advanced economies except in the US, where the labour share still declines by 6% since 1980 (Figure 1).
The Payment Protection Insurance (PPI) mis-selling scandal has rumbled on for years. But how did PPI impact loan margins pre-crisis?
This post argues
that income from cross-selling PPI substantially offset lenders’ margins on
personal loans between 2004 and 2009, and compares the pre-crisis PPI-adjusted
margin to loan spreads today.
According to conventional wisdom, a currency area benefits from internal labour mobility. If independent stabilisation policies are unavailable, the argument goes, factor mobility helps regions respond to shocks. Reasonable as it sounds, few attempts have been made to test this intuition in state-of-the-art macroeconomic models. In a recent Staff Working Paper (also available here), we build a DSGE model of a currency area with internal migration to go through the maths. So does the old intuition hold up? The short answer, we think, is yes. Internal labour mobility eases the burden on monetary policy by reducing regional labour markets imbalances. But policymakers can improve welfare by putting greater weight on unemployment. Effectively, interregional migration justifies a somewhat higher ‘lambda’.
Is uncertainty a significant drag for investment and consumption? Since the global financial crisis heightened uncertainty has been considered to be one of the main factors behind the depth of the great recession and the subdued recovery. Understanding the channels through which uncertainty affects economic activity is therefore of primary interest for policymakers in order to design appropriate policy responses. In our recent working paper, we show that shocks increasing macroeconomic uncertainty can lead to very persistent negative effects on economic activity that last well beyond the business cycle frequency. In a theoretical framework, we argue that the presence of long-term risks about the economic outlook can exacerbate the households’ precautionary savings motive and the overall effects of uncertainty shock.
Tommaso Aquilante, Marco Garofalo and Enrico Longoni
Over the past few decades production processes have become increasingly complex and integrated across national boundaries through so-called Global Value Chains (GVCs). With increasing trade tensions and uncertainty regarding future economic integration, the 400-year old words of the English poet John Donne captured in ‘No man is an island’ seem more topical than ever. In this BU we explore the UK’s position in GVCs showing that also no island is really an island! Using a sophisticated yet intuitive decomposition of UK’s trade flows we will show how GVCs matter for the UK economy, and in particular how they seem to matter more for what we export than imports.
Montagu Norman was the Bank of England’s longest serving Governor (1920-44) and one of the leading players on the interwar international financial stage. He was a controversial and enigmatic character who pioneered co-operation between central banks.
Carlo Favero, Sebastian Vismara and Iryna Kaminska
The slope of the yield curve has decreased in the US and the UK over the last few years (Chart 1). This development is attracting significant attention, because the yield curve slope (i.e. the difference between longer term government bond yields and shorter term government bond yields) is a popular business cycle indicator, and a fall of longer term yields below shorter term yields (i.e. an ‘inversion’ of the yield curve) has historically been considered as a powerful signal of recessions, particularly in the US.
Machine learning models are at the forefront of current advances in artificial intelligence (AI) and automation. However, they are routinely, and rightly, criticised for being black boxes. In this post, I present a novel approach to evaluate machine learning models similar to a linear regression – one of the most transparent and widely used modelling techniques. The framework rests on an analogy between game theory and statistical models. A machine learning model is rewritten as a regression model using its Shapley values, a payoff concept for cooperative games. The model output can then be conveniently communicated, eg using a standard regression table. This strengthens the case for the use of machine learning to inform decisions where accuracy and transparency are crucial.
Thomas Mathae, Stephen Millard, Tairi Room, Ladislav Wintr and Robert Wyszynski
How do firms respond to shocks? Do they first change the hours worked by their employees? Or the number of employees? Or wages? Or a combination? Does the shock matter? And the firm’s country? One way of answering these questions is to ask the managers within firms themselves. And this is exactly what the Wage Dynamics Network did, surveying firms in 25 European countries. Our research used this survey to answer these questions. We found that in response to negative shocks firms were most likely to reduce employment, then wages and then hours, regardless of the source of the shock. But, in response to positive shocks, firms were most likely to raise wages, then employment and then hours.