Category Archives: Monetary Policy

Monetary policy spillovers in the first age of financial globalisation: ripple or a riptide?

Georgina Green

In the first age of financial globalisation, from around 1880 to 1913, many countries tied their currencies to the mast of gold. The Bank of England’s unparalleled influence over this period is depicted by the Lady of the Bank, seated on the globe with a shower of gold coins to one side, which is carved into the Bank’s pediment. There was an old saying in the City that the Bank’s rate could draw gold from the moon. But could it?

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Filed under Economic History, Monetary Policy

Can central bankers become Superforecasters?

Aakash Mankodi and Tim Pike

Tetlock and Gardner’s acclaimed work on Superforecasting provides a compelling case for seeing forecasting as a skill that can be improved, and one that is related to the behavioural traits of the forecaster. These so-called Superforecasters have in recent years been pitted against experts ranging from U.S intelligence analysts to participants in the World Economic Forum, and have performed on par or better by accurately predicting the outcomes of a broad range of questions. Sounds like music to a central banker’s ears? In this post, we examine the traits of these individuals, compare them with economic forecasting and draw some related lessons. We conclude that considering the principles and applications of Superforecasting can enhance the work of central bank forecasting.

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Filed under Macroeconomics, Monetary Policy, New Methodologies

Is a steeper yield curve good news for banks? A challenge to the conventional wisdom

Oliver Brenman, Frank Eich, and Jumana Saleheen

The conventional wisdom amongst financial market observers, academics, and journalists is that a steeper yield curve should be good news for bank profitability.   The argument goes that because banks borrow short and lend long, a steeper yield curve would raise the wedge between rates paid on liabilities and received on assets – the so-called “net interest margin” (or NIM).  In this post, we present cross-country evidence that challenges this view.  Our results suggest that it is the level of long-term interest rates, rather than the slope of the yield curve, that drives banks’ NIMs.

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Filed under Banking, Financial Markets, Financial Stability, Monetary Policy

Optimal quantitative easing

Richard Harrison

Ben Bernanke famously remarked that “the trouble with QE is that it works in practice but not in theory”.  And ahead of its adoption, many academics were sceptical that QE would have any effects at all.  Yet despite QE being a part of the monetary policy landscape for nearly a decade, the bulk of academic research on QE has been on its empirical effect, with relatively little on theory and less still on normative policy questions. In a recent Staff Working Paper I develop a model which can provide answers to questions such as: “How should monetary policymakers return their instruments to more normal levels?” and “Should QE be part of the regular monetary policy toolkit?”

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Filed under Macroeconomics, Monetary Policy

New machines for The Old Lady

Chiranjit Chakraborty and Andreas Joseph

Rapid advances in analytical modelling and information processing capabilities, particularly in machine learning (ML) and artificial intelligence (AI), combined with ever more granular data are currently transforming many aspects of everyday life and work. In this blog post we give a brief overview of basic concepts of ML and potential applications at central banks based on our research. We demonstrate how an artificial neural network (NN) can be used for inflation forecasting which lies at the heart of modern central banking.   We show how its structure can help to understand model reactions. The NN generally outperforms more conventional models. However, it struggles to cope with the unseen post-crises situation which highlights the care needed when considering new modelling approaches.

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Filed under Microprudential Regulation, Monetary Policy, New Methodologies

A LOOPy model of inflation

Alex Tuckett

The Law of One Price (LOOP) is an old idea in economics. LOOP states that the same product should cost the same in different places, expressed in the same currency. The intuition is that arbitrage (buying a product where it is cheap and selling it where it is expensive) should bring prices back into line. Can LOOP help us understand UK inflation? Yes. I find EU prices have much higher explanatory power for UK prices than domestic cost pressures, and the effects of exchange rate changes last longer, but build more slowly than commonly assumed.

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Filed under Currency, International Economics, Macroeconomics, Monetary Policy

How will households react to the real income squeeze?

Philip Bunn and Jeremy Rowe

Rising inflation is eroding the spending power of UK households’ incomes.  How will they react to that?  The answer will make a big difference to the economic outlook.  Will they dip into savings and carry on buying the same amount of goods and services, or will they just spend the same and be able to buy less with it?  New survey evidence suggests that households intend to do a bit of both with nominal spending increasing by around half of the rise in prices but real consumption also falling.  But not all households say they will respond in the same way: households with debts and limited savings to fall back on are less likely to be able to increase spending.
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Filed under Macroeconomics, Monetary Policy

Central Bank Balance Sheets: Past, Present and Future

James Barker, David Bholat and Ryland Thomas.

Central bank balance sheets swelled in size in response to the financial crisis of 2007-09. In this blog we discuss what makes them different from the balance sheets of other institutions, how they’ve been used in the past, and how they might evolve in the future as means to implement novel policies – including the revolutionary possibility that a central bank could issue its own digital currency.
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Filed under Banking, Economic History, Macroeconomics, Monetary Policy

The Forward Guidance Paradox

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.

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Filed under Macroeconomics, Monetary Policy, New Methodologies

Bitesize: How do fees affect overdraft pricing?

Dom Tighe.

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?

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Filed under Banking, Monetary Policy