What can we learn about monetary policy transmission using international industry-panel data?

Sangyup Choi, Tim Willems and Seung Yong Yoo

How does monetary policy really affect the real economy? What kinds of firms or industries are more sensitive to changes in the stance of monetary policy, and through which exact channels? Despite advances in our understanding of the monetary transmission mechanism, existing studies have not reached a consensus regarding the exact mechanics of transmission. In a recently published Staff Working Paper, we aim to contribute to this understanding by analysing the impact of monetary policy on industry-level outcomes across a broad international industry-panel data set, exploiting the notion that different transmission channels are of varying degrees of importance to different industries.

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Tradable cost shocks and non-tradable inflation: real wages and spillovers

Ambrogio Cesa-Bianchi, Federico Di Pace, Aydan Dogan and Alex Haberis

The recent steep rise in energy prices led to a rise in the price of energy-intensive tradable goods, with inflationary pressures subsequently broadening into services in many economies. Because services are less traded and have little energy input some have suggested this broadening might indicate inflationary pressures becoming more persistent. In this post, we explore the issue through the lens of a stylised two-country model with a tradable and a non-tradable sector. It suggests that following an energy price shock: i) the broadening of inflation from goods to services need not imply more persistent inflationary pressure or changed longer-run expectations, but may reflect one-off adjustments via domestic labour markets; and ii) Inflationary pressures in non-tradable sectors can still have sizable international spillovers.

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The challenges of measuring financial conditions

Natalie Burr

The challenge of measuring financial conditions

Imagine you were tasked with thinking about how financial conditions have changed over a policy tightening cycle. Different economists would come to very different conclusions, and none would necessarily be wrong. Why? Because measuring financial conditions is challenging – for a variety of reasons. A financial conditions index (FCI) is a common solution, and its advantage lies in the disadvantage of the alternative: it is simpler than making a judgement across a range of individual variables. In this post, I propose one method to create a UK FCI. I find that financial conditions have tightened significantly over the past two years, coming from a period of accommodative conditions following Covid.

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Time-varying disagreement and monetary transmission

Vania Esady

In macroeconomic models, economic agents are often assumed to perfectly observe the current state, but in reality they have to infer current conditions (nowcast). Because of information costs, this is not always easy. Information costs are not observable in the data but they can be proxied. A good proxy is disagreement on a near-term forecast because significant disagreement indicates that it is difficult to observe current economic conditions – ie higher information frictions. If the ability to nowcast varies over time, this may affect agents’ ability to respond to various shocks, including monetary policy shocks. My recent paper shows that when disagreement is higher, contractionary monetary policy brings down inflation, at the cost of a greater fall in economic activity.

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What does the rise in the inflation mean for financial stability?

Kristina Bluwstein, Sudipto Karmakar and David Aikman

Introduction

Inflation reached almost 9% in July 2022, its highest reading since the early 1990s. A large proportion of the working age population will never have experienced such price increases, or the prospect of higher interest rates to bring inflation back under control. In recent years, many commentators have been concerned about risks to financial stability from the prolonged period of low rates, including the possibility of financial institutions searching for yield by taking on riskier debt structures. But what about the opposite case? What financial stability risks do high inflation and increasing interest rates pose?

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Bitesize: Riding the waves: the breadth of global monetary policy changes

Shaheen Bhikhu and Thomas Viegas

Central banks respond to inflation by setting interest rates in order to achieve domestic price stability. Occasionally, economic shocks are global in nature and so monetary policy can move in tandem across the world. But how common have directional changes in monetary policy been across the world over recent decades?

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Bonus episode: understanding pay and labour market tightness

Josh Martin

Everyone likes a bonus – be it a bonus in pay, or a bonus episode for your favourite TV show. Everyone, that is, except statisticians. Bonuses are hard to define and measure and are often excluded from data on pay. But bonuses could be really important to understand labour market tightness – a topic of much interest at the moment. This blog takes a quick walk through some pay measures, highlighting the role of bonuses, and exploring what has happened to bonuses before, during and since the pandemic.

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Monetary policy transmission during QE times: role of expectations and premia channels

Iryna Kaminska and Haroon Mumtaz

Since 2009, when policy rates reached their effective lower bound, quantitative easing (QE) has become an important instrument of central bank monetary policy. It is aimed to work via long-term yields. The literature confirms that QE helped lower long-term yields. But the yields have two components – expectations and term premia – and open questions remain: does QE reduce yields via expected rates or term premia? And which channel is more efficient in stimulating the economy? In our research paper, we find evidence that QE often worked through signalling and term-premia effects simultaneously. But the two main QE channels are transmitted to financial markets and the real-economy in different ways, and only signalling is found to have ultimately affected inflation significantly.

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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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