Rolling substitutions in financial markets: did quantitative easing in 2020 lead to portfolio rebalancing?

Jack Worlidge

Purchases of government bonds have been a prominent tool that has helped central banks meet inflation objectives when short-term interest rates have been constrained by their effective lower bounds. But how does QE work? There are a range of channels through which QE can/might operate, though there remains uncertainty over the relative size and importance of these channels. This post presents new evidence from granular transaction data consistent with a portfolio rebalancing channel. Specifically, during the Bank’s latest QE programme (known as QE5) investors were found to have bought less new gilt issuance and bought more risky assets like corporate bonds.

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Adapting lending policies in a ‘negative-for-long’ scenario

Miguel García-Posada and Sergio Mayordomo

In February, the Bank hosted its inaugural Bank of England Agenda for Research (BEAR) conference, with the theme of ‘The Monetary Toolkit’. As part of our occasional series of Guest Posts by external presenters at Bank research events, the authors of one paper from the BEAR conference outline their findings on the effect of negative rates on Spanish banks…

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Monetary and fiscal policy in interwar Britain

David Ronicle

Macroeconomic outcomes in Britain’s interwar years were terrible – they featured two of modern Britain’s worst recessions, unemployment twice peaked above 20% and was rarely below 10% and there were two periods of chronic deflation. Policy, meanwhile, was pulled in multiple directions by multiple objectives – employment, price and financial stability and debt sustainability. These challenges gave birth to modern macroeconomics, inspiring the work of John Maynard Keynes. In a new working paper, I apply modern empirical techniques to look at the period with fresh eyes. I find that monetary and fiscal policy played a central role in macroeconomic developments – and that outcomes could have been better had policymakers been less wedded to the traditional policy consensus, and especially the Gold Standard.

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More than words: Bank of England publications and market prices

Timothy Munday

How easy is it to understand this sentence you are currently reading? How easy it is to understand this sentence that has dependency arcs that are longer that make it more difficult to read? How about if my writing is magniloquent? Or what if I use normal words? Writing style matters for how easy it is to read text. This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. I find that Bank of England publications that summarise their content in the first sentence, and use less unexpected vocabulary, are associated with a faster time for swap markets to reach a new equilibrium price following the publication release.

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Financial concerns and the marginal propensity to consume

Georgina Green and Bruno Albuquerque

How would you respond to a one-off change in your income? For example, how would you react to someone handing you £500? Throughout the pandemic a large group of UK households were asked this hypothetical question in a survey. Households were also asked for other information, for instance about their debt, savings, and expectations for the future, giving us an opportunity to unpick their responses. We might expect households who are concerned about their financial future to be less eager to spend than others, preferring to save up for rainier days. In a new paper, we find the opposite result: concerned households would in fact spend around 20% more than others.

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Sluggish deposit rates and the effects of monetary policy

Alberto Polo

Could the slow response of deposit rates to changes in monetary policy strengthen its impact on the economy? At first look, the answer would probably be ‘no’. Imperfect pass-through of policy to deposit rates means that the rates on a portion of assets in the economy respond by less than they could. But what if this meant that the rates on other assets responded by more? In a recent paper, I develop a model that is consistent with a number of features of banks’ assets and liabilities and find that monetary policy has a larger effect on economic activity and inflation if the pass-through of policy to deposit rates is partial.

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The Bank of England’s 2022 Priority Topics for research

Alongside our multi-year ‘Bank of England Agenda for Research’, the Bank also publishes a set of ‘Priority Topics’, which change each calendar year. The new 2022 Priority Topics are now available on the Bank’s website (see ‘2022 Priority Topics’ under each theme).


Rebecca Freeman, Managing Editor.

Words which travel the world: global spillovers of the Fed information effect

Marco Pinchetti and Andrzej Szczepaniak

It is certainly not a mystery that the Fed’s monetary policy is of great importance for financial markets and the global economy. However, in a recently published Staff Working Paper, we show that the Fed’s monetary policy measures are not the only valuable piece of information contained in the Fed’s announcements. Changes in the Fed’s economic assessment drive investors’ risk behaviour and international capital allocation decisions. Through this channel, changes in Fed views can affect financial conditions and economic activity in the rest of the world, independent of policy actions. 

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The macroprudential toolkit: effectiveness and interactions

Stephen Millard, Margarita Rubio and Alexandra Varadi

The 2008 global financial crisis showed the need for effective macroprudential policy. But what tools should macroprudential policy makers use and how effective are they? We examined these questions in in a recent staff working paper. We introduced different macroprudential tools into a dynamic stochastic general equilibrium (DSGE) model of the UK economy and compared their impact on the economy and household welfare, as well as their interaction with each other and with monetary policy. We found that capital requirements reduce the effects of financial shocks. Instead, a limit on how much of borrowers’ income is spent on mortgage interest payments reduces the volatility of lending, output and inflation resulting from housing market shocks.

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Preferred habitat behaviour in the gilt market

Julia Giese, Michael Joyce, Jack Meaning and Jack Worlidge

Every financial market transaction has two parties, each with their own preferences. One channel through which quantitative easing works rests on these differences: preferred habitat investors value certain assets above others for non-pecuniary reasons, beyond risk and return. Central bank asset purchases of the preferred asset create scarcity, which may lead to compensating price adjustment, with spillovers to other assets and the macroeconomy. There is, however, little hard evidence on these investors. In a staff working paper, we use a new granular data set on gilt market holdings and transactions to identify groups of investors with preferred portfolio duration habitats. We present a case study suggesting that the Bank’s purchases appear to have come disproportionately from one group of these investors with a relatively strong preference for specific gilt maturities.

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