Category Archives: New Methodologies

Does domestic uncertainty really matter for the economy?

Ambrogio Cesa-Bianchi , Chris Redl,  Andrej Sokol and Gregory Thwaites

Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.

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Filed under Financial Markets, International Economics, Macroeconomics, New Methodologies

The decline of solvency contagion risk

Marco Bardoscia, Paolo Barucca, Adam Brinley Codd and John Hill

The failure of Lehman Brothers on 15 September 2008 sent shockwaves around the world.  But the losses at Lehman Brothers were only the start of the problem.  The price of their bonds halved, almost overnight.  Other institutions that held Lehman’s debt faced huge losses, and markets feared that those losses could trigger further failures. The good news is that our latest research suggests that risks within the UK banking system from one such contagion channel, “solvency contagion”, have declined sharply since 2008. We have developed a new model which quantifies risk from this channel, and helps us understand why it has fallen.  Regulators are using the model to monitor this particular source of risk as part of the Bank’s annual concurrent stress test exercise.

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Filed under Financial Stability, Macroprudential Regulation, New Methodologies

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

The impact of Brexit-related shocks on global asset prices

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.

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Filed under Financial Markets, International Economics, Monetary Policy, New Methodologies

Big Data jigsaws for Central Banks – the impact of the Swiss franc de-pegging

Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios

The Bank of England has now access to transaction-level data in over-the-counter derivatives (OTCD) markets which have been identified to lie at the centre of the Global Financial Crisis (GFC) 2007-2009. With tens of millions of daily transactions, these data catapult central banks and regulators into the realm of big data.  In our recent Financial Stability Paper, we investigate the impact of the de-pegging in the euro-Swiss franc (EURCHF) market by the Swiss National Bank (SNB) in the morning of 15 January 2015. We reconstruct detailed trading and exposure networks between counterparties and show how these can be used to understand unprecedented intraday price movements, changing liquidity conditions and increased levels of market fragmentation over a longer period.

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Filed under Currency, Financial Stability, Market Infrastructure, New Methodologies

An intuitive interpretation of factor models

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.

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Filed under Macroeconomics, Monetary Policy, New Methodologies

What happened to competition between UK deposit takers over the past 25 years?

Sebastian J A de-Ramon and Michael Straughan.

The landscape for competition between UK deposit takers (retail banks and building societies) was reset in the 1980s with the removal of the bank “corset” (1981), the Big Bang reforms and the Building Societies Act (both in 1986). These reforms facilitated entry and expansion of different business models into markets that had previously been off-limits. What followed was a significant restructuring of the deposit taking sector in the UK. In a new paper, we show that competition between UK deposit takers weakened substantially in the years leading up to the financial crisis.

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Filed under Banking, Economic History, Financial Stability, New Methodologies

Low for long: what does this mean for defined-benefit pensions in the UK?

Frank Eich and Jumana Saleheen.

Despite the fact that the financial crisis erupted nearly a decade ago, its legacy is still being felt today.  Disappointingly weak growth and low interest rates are arguably part of that legacy (though other developments also matter), and policy makers are increasingly worried that these are no longer temporary phenomena but instead have become permanent features.  This blog assesses what a prolonged period of weak growth and low interest rates (sometimes also referred to by “secular stagnation” or “low for long”) might mean for the viability of defined-benefit (DB) occupational pension schemes in the UK and what financial stability risks might arise as a result of a changing business environment.

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Filed under Banking, Financial Markets, Macroeconomics, New Methodologies

Bitesize: Exploring UK sectoral productivity

Ian Billett and Patrick Schneider.

As time goes to infinity, the probability that a productivity analyst will wonder ‘which sectors are driving these trends?’ goes to one. We present an interactive sectoral productivity tool to help you explore this question without any fuss.

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Filed under Bitesize, Macroeconomics, New Methodologies

Mind over matter: is scarcity as much about psychology as it is economics?

Dan Nixon.

“Unlimited wants, scarce resources”. This is the economic problem.  But once basic needs are met, how much should scarcity – having “enough” – be understood as a psychological problem? Is it possible to cultivate an “abundance mindset”? And what does all of this mean for how economics is taught?

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Filed under New Methodologies