Alex Haberis, Richard Harrison and Matt Waldron.
In textbook models of monetary policy, a promise to hold interest rates lower in the future has very powerful effects on economic activity and inflation today. This result relies on: a) a strong link between expected future policy rates and current activity; b) a belief that the policymaker will make good on the promise. We draw on analysis from our Staff Working Paper and show that there is a tension between (a) and (b) that creates a paradox: the stronger the expectations channel, the less likely it is that people will believe the promise in the first place. As a result, forward guidance promises in these models are much less powerful than standard analysis suggests.
In recent years there has been a notable move to lenders charging a daily or monthly fee on overdrafts. Although not technically an interest rate, they are nonetheless a cost of borrowing. And in some cases, may have replaced interest charges entirely. So are customers charged more than the interest-charging overdraft rate alone suggests?
Since 2012, long term rates have fallen and there have been various other policy packages to boost credit availability and lower borrowing costs. But how have these fed through to different types of fixed mortgage rates?
How have falling retail deposit interest rates affected savers’ behaviour? One place to look is the market for fixed-rate bonds, which give a guaranteed interest rate for a set period of time. These rates tend to be higher than instant access accounts, because customers must tie up their deposits to receive the higher rate. Fixed-rate bonds represented around 40% of new time deposits in January 2017. Continue reading
Evidence suggests that small and medium-sized businesses (SMEs) rely more on bank credit than other businesses. So how has their cost of borrowing fared since last year’s Bank Rate cut? And how do their rates compare with overall businesses? Continue reading
Marek Raczko, Mo Wazzi and Wen Yan
Economists view the United Kingdom as a small-open economy. In economists’ jargon it means that the UK is susceptible to foreign shocks, but that UK shocks do not influence other countries. This definitely was not the case in 2016. The result of the EU referendum, even though it was a UK-specific policy event, had a global impact. Our analysis shows that the Brexit vote not only had a significant impact on UK bond and equity markets, but also spilled over significantly to other advanced economies. Moreover, this approach suggests that the initial Brexit-shock has only partially reversed and still remains a drag on global bond yields and equity prices, though there are wide error bands around that conclusion.
Sinem Hacioglu Hoke and Kerem Tuzcuoglu
We economists want to have our cake and eat it. We have far more data series at our disposal now than ever before. But using all of them in regressions would lead to wild “over-fitting” – finding random correlations in the data rather than explaining the true underlying relationships. Researchers using large data sets have historically experienced this dilemma – you can either throw away some of the information and retain clean, interpretable models; or keep most of the information but lose interpretability. This trade-off is particularly frustrating in a policy environment where understanding the identified relationships is crucial. However, in a recent working paper we show how to sidestep this trade-off by estimating a factor model with intuitive results.
Mauricio Armellini and Tim Pike.
This post highlights some of the possible economic implications of the so-called “Fourth Industrial Revolution” — whereby the use of new technologies and artificial intelligence (AI) threatens to transform entire industries and sectors. Some economists have argued that, like past technical change, this will not create large-scale unemployment, as labour gets reallocated. However, many technologists are less optimistic about the employment implications of AI. In this blog post we argue that the potential for simultaneous and rapid disruption, coupled with the breadth of human functions that AI might replicate, may have profound implications for labour markets. We conclude that economists should seriously consider the possibility that millions of people may be at risk of unemployment, should these technologies be widely adopted.
Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico.
If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size.
Empirical identification of the effects of monetary policy requires isolating exogenous shifts in the policy instrument that are distinct from the systematic response of the central bank to actual or foreseen changes in the economic outlook. Because the same tools are used to both induce changes in the economy, and to react to them, distinguishing between cause and effect is a far from trivial matter. One popular way is to use surprises in financial markets to proxy for the shock. In a recent paper, we argue that markets are not able to distinguish the shocks from the systematic component of policy if their forecasts do not align with those of the central bank. We thus develop a new measure of monetary shocks, based on market surprises but free of anticipatory effects and unpredictable by past information.