Uncovering uncovered interest parity: exchange rates, yield curves and business cycles

Simon Lloyd and Emile Marin

The textbook uncovered interest parity (UIP) condition states that the expected change in the exchange rate between two countries over time should be equal to the interest rate differential at that horizon. While UIP appears to hold at longer horizons (around 5-10 years), it is regularly rejected at shorter ones (0-4 years). In a recent paper, we argue that interest rates at other maturities — captured in the slope of the yield curve — reflect information about the pricing of ‘business cycle risks’, which can help explain departures from UIP. A country with a relatively steep yield curve slope will tend to experience a depreciation in excess of the UIP benchmark, at business cycle frequencies especially.

Continue reading “Uncovering uncovered interest parity: exchange rates, yield curves and business cycles”

Monetary policy and US housing expansions: what can we expect for the post-COVID-19 housing recovery?

Bruno Albuquerque, Martin Iseringhausen and Frédéric Opitz

The fall in aggregate demand due to the COVID-19 shock has brought the eight-year long US housing market expansion to a halt. At the same time, the Federal Reserve and the US Government have deployed significant resources to support households and businesses. These actions should help weather the ongoing crisis and lay the seeds for the next recovery. It is, however, highly uncertain how the post-COVID-19 housing recovery will look. Using a time-varying parameter (TVP) model on US aggregate data, our results suggest that the next housing recovery may exhibit similar features to the 2012-19 expansion: a sluggish response of housebuilding to rising demand, but a strong response of house prices.

Continue reading “Monetary policy and US housing expansions: what can we expect for the post-COVID-19 housing recovery?”

Monetary Policy Transmission: Borrowing Constraints Matter!

Fergus Cumming and Paul Hubert

How does the transmission of monetary policy depend on the distribution of debt in the economy? In this blog post we argue that interest rate changes are most powerful when a large share of households are financially constrained. That is, when a higher proportion of all borrowers are close to their borrowing limits. Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.

Continue reading “Monetary Policy Transmission: Borrowing Constraints Matter!”

How does monetary policy affect firms?

Saleem Bahaj, Angus Foulis, Gabor Pinter and Paolo Surico

Changes in interest rates affect different parts of the economy differently. In this post, building on a recent working paper, we consider how different types of firms respond to interest rate changes. We focus on firm level employment and ask which firms do the most hiring and firing when monetary policy adjusts. For instance, how important is the age of the firm, its balance sheet position or its size in determining the firm level response to interest rates? Furthermore, do these patterns of responses tell us something about how monetary policy affects the economy?

Continue reading “How does monetary policy affect firms?”

The declining elasticity of US housing supply

Bruno Albuquerque, Knut Are Aastveit and André Anundsen

Housing supply elasticities – builders’ response to a change in house prices – help explain why house prices differ across location. As housing supply becomes more inelastic, the more rising demand translates to rising prices and the less to additional housebuilding. In a new paper, we use a rich US dataset and novel identification method to show that supply elasticities vary across cities and across time. We find that US housing supply has become less elastic since the crisis, with bigger declines in places where land-use regulation has tightened the most, and in areas that had larger price declines during the crisis. This new lower elasticity means US house prices should be more sensitive to changes in demand than before the crisis.

Continue reading “The declining elasticity of US housing supply”

The birds, the bees and the Bank? The birth-rate channel of monetary policy

Fergus Cumming and Lisa Dettling

Children are expensive. Swings in families’ cash-flow can therefore move the dial on families’ decisions on whether and when to have a baby. For mortgaged families with an adjustable interest rate in 2008, the sharp fall in Bank Rate amounted to a windfall of around £1,000 per quarter in lower mortgage payments. In this post we show that people responded to this cash-flow boost by having more children. In total, we estimate that monetary policy increased the birth rate in the following three years by around 7.5%. That’s around 50,000 extra babies.

Continue reading “The birds, the bees and the Bank? The birth-rate channel of monetary policy”

Do emerging market prudential policies lessen the spillover effects of US monetary policy?

Andra Coman and Simon Lloyd

Prudential policies have grown in popularity as a tool for addressing financial stability risks since the 2007-09 global financial crisis. Yet their effects are still debated, with sanguine and more pessimistic viewpoints. In a recent Bank of England Staff Working Paper, we assess the extent to which emerging market (EM) prudential policies can partially insulate their domestic economies against the spillovers from US monetary policy. Using a database of prudential policies implemented by EMs since 2000, our estimates indicate that each additional prudential policy tightening can dampen the decline in total credit following a US monetary policy tightening by around 20%. This suggests that domestic prudential policies allow EMs to insulate themselves somewhat from global shocks.

Continue reading “Do emerging market prudential policies lessen the spillover effects of US monetary policy?”

Bitesize: What can the MPC minutes tell us about the policymaker’s uncertainty?

Michal Stelmach

Policymaking is invariably uncertain. I created a new index of ‘policymaker’s uncertainty’ based on a textual search of the minutes of the MPC meetings since 1997. The index is constructed by simply calculating the number of references to the word ‘uncertainty’ (and its derivatives, including ‘not certain’ and ‘far from certain’) as a share of the total word count. To avoid double-counting, it also excludes the Monetary Policy Summary that was introduced in 2015. One caveat of this approach is that it doesn’t distinguish instances of low or falling uncertainty from those where uncertainty was high. That aside, this measure can offer a new insight into uncertainty compared to indicators based on media references or business surveys.

Continue reading “Bitesize: What can the MPC minutes tell us about the policymaker’s uncertainty?”

The ownership of central banks

David Bholat and Karla Martinez Gutierrez

Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?

In this blog post, we explore the variety of central bank ownership structures, both historically and globally.  We also suggest areas for future research on the topic.

Continue reading “The ownership of central banks”

Bitesize: Fixing ideas – The Slowing of Interest-rate Pass-through to Mortgagors

Fergus Cumming

When choosing a mortgage, a key question is whether to choose a fixed or variable-rate contract. By choosing the former, households are unaffected by official interest-rate decisions for the length of the fixation period. We can use transaction data on residential mortgages to get a sense of how long it takes interest-rate decisions to filter through to people’s finances.

Continue reading “Bitesize: Fixing ideas – The Slowing of Interest-rate Pass-through to Mortgagors”