The transmission of macroprudential policy in the tails

Álvaro Fernández-Gallardo, Simon Lloyd and Ed Manuel

Since the 2007–09 Global Financial Crisis, central banks have developed a range of macroprudential policies (‘macropru’) to address fault lines in the financial system. A key aim of macropru is to reduce ‘left-tail risks‘ – ie, minimise the probability and severity of future economic crises. However, building this resilience could influence other parts of the GDP-growth distribution and so may not always be costless. In our Working Paper, we gauge these potential costs and benefits by estimating the effects of macropru on the entire GDP-growth distribution, and explore its transmission channels. We find that macropru is effective at reducing the variance of GDP growth, and that it does so by reducing the probability and severity of excessive credit booms.

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Fuelling the tail: inflation- and GDP-at-Risk with oil-supply shocks

Marco Garofalo, Simon Lloyd and Edward Manuel

The economic consequences of the Russia-Ukraine war have brought the importance of sharp changes in commodity prices, such as oil, to centre stage. While many have focused on understanding the impact of these developments on the central projection for the macroeconomic outlook, this post investigates the balance of risks arising from oil-supply shocks, asking: could these lead to more severe or persistent changes in output growth and inflation, in rare events? Through the lens of a simple statistical model of Inflation- and GDP-at-Risk, we quantify the macroeconomic risks to inflation and GDP growth associated with (exogenous) changes in oil supply, showing that these shocks have more pronounced effects on the upper tail of the inflation distribution than at the centre.

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Unknown measures: assessing uncertainty around UK inflation using a new Inflation-at-Risk model

Nikoleta Anesti, Marco Garofalo, Simon Lloyd, Edward Manuel and Julian Reynolds

Understanding and quantifying risks to the economic outlook is essential for effective monetary policymaking. In this post, we describe an ‘Inflation-at-Risk’ model, which helps us assess the uncertainty and balance of risks around the outlook for UK inflation, and understand how this uncertainty relates to underlying economic conditions. Using this data-driven approach, we find that higher inflation expectations are particularly important for driving upside risks to inflation, while a widening in economic slack is important for downside risks. Our model highlights that rising tail-risks can become visible before a turning point, making the approach a useful addition to economists’ forecasting toolkit.

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Dissecting UK service inflation via a neural network Phillips curve

Marcus Buckmann, Galina Potjagailo and Philip Schnattinger

Understanding the origins of currently high inflation is a challenge, since the effects from a range of large shocks are layered on top of each other. The rise of UK service price inflation to up to 6.9% in April might potentially reflect external shocks propagating to a wider range of prices and into domestic price pressures. In this blog post we disentangle what might have contributed to the rise in service inflation in the UK using a neural network enhanced with some economic intuition. Our analysis suggests that much of the increase stems from spillovers from goods prices and input costs, a build-up of service inflation inertia and wage effects, and a pick-up in inflation expectations.

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Flash loans, flash attacks, and the future of DeFi

Aidan Saggers, Lukas Alemu and Irina Mnohoghitnei

Decentralised Finance (DeFi) may seem a tempting option for those seeking financial gain, autonomy, and self-governance… But how safe is a world in which ‘code is law’? Closer inspection reveals an ecosystem experiencing several hacks, attacks, and fraud. Estimates show at least US$6.5 billion has been stolen since DeFi’s inception, and one particular DeFi feature is often at the centre of this theft – flash loans. Unlimited, ungoverned, and uncollateralised, flash loans give hackers the toolkit to highly leverage their potential attacks. The only cost is the gas fees required to send the transaction. In this blog post we consider the world of flash loans and their criminal counterpart – flash attacks.

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Booming entrepreneurship during the Covid-19 pandemic

Saleem Bahaj, Sophie Piton and Anthony Savagar

Recessions typically discourage entrepreneurs from starting new businesses. During the Great Recession, a ‘generation’ of start-ups went missing which contributed to a slow recovery in employment.  Two years after the pandemic started, evidence for the UK suggests a very different story: the pandemic inspired many entrepreneurs to start new businesses and this supported the recovery in employment.

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What did we learn from working from home during Covid?

Lena Anayi, John Lewis and Misa Tanaka

Since the onset of Covid-19, firms and workers have adopted and adapted to new working arrangements, which involved some workers primarily or exclusively working from home (WFH). What lessons – if any – can be drawn from this experience to inform future of work? A previous blog post examined how WFH might affect productivity. This blog post reviews more recent research on the experience of WFH during Covid, and considers what can be learnt about the impact of WFH on time use, workplace interactions and productivity.

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Uncertainty in financial crisis prediction: a Bayesian approach

Jack Page

Systemic financial crises occur infrequently, giving relatively few crisis observations to feed into the models that try to warn when a crisis is on the horizon. So how certain are these models? And can policymakers trust them when making vital decisions related to financial stability? In this blog, I build a Bayesian neural network to predict financial crises. I show that such a framework can effectively quantify the uncertainty inherent in prediction.

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More than words: Bank of England publications and market prices

Timothy Munday

How easy is it to understand this sentence you are currently reading? How easy it is to understand this sentence that has dependency arcs that are longer that make it more difficult to read? How about if my writing is magniloquent? Or what if I use normal words? Writing style matters for how easy it is to read text. This post asks if writing style can influence how long markets take to digest Bank of England monetary policy information. I find that Bank of England publications that summarise their content in the first sentence, and use less unexpected vocabulary, are associated with a faster time for swap markets to reach a new equilibrium price following the publication release.

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Citizens’ advice: lessons from the public

Kel Nwanuforo, Andrew Mills and Sharon Raj

The Citizens’ Panels (now the Citizens’ Forum) is a Bank of England discussion forum to engage with the UK public on important topics such as the labour and housing markets, or climate change. It included a forecasting competition, and Bank Underground invited the winners to contribute short pieces about how they evaluate the UK economy, discuss issues of their concern, and to propose solutions.

Part of Bank Underground’s purpose is to give a platform for views from Bank of England (‘Bank’) analysts that may differ from those of the Bank or its policy committees. Alternative views are encouraged within the Bank, but the range of opinions and ways of thinking by analysts is likely to be limited to some extent: by education, experience and less tangible factors such as the language analysts use to explain their thoughts. The Citizens’ Panels therefore offer a rich source of information. By now, they include some 3,200+ participants with a wide range of backgrounds: some are familiar with economics and central banking but many may know little about either. This blog represents the voices of some of those panel members about the UK economy, and how they addressed the forecasting challenge, which we put in front of participants as part of the Citizens’ Forum online community – which by-the-way is open to all.

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