Handel and the Bank of England

Ellen T. Harris

This guest post is the third of an occasional series of guest posts by external researchers who have used the Bank of England’s archives for their work on subjects outside traditional central banking topics.

George Frideric Handel was a master musician — an internationally renowned composer, virtuoso performer, and music director of London’s Royal Academy of Music, one of Europe’s most prestigious opera houses. For musicologists, studying his life and works typically means engaging with his compositional manuscripts at The British Library, as well as the documents, letters, and newspapers that describe his interaction with royalty, relationships to others, and contemporary reaction to his music. But when I began to explore Handel’s personal accounts at the Bank of England twenty years ago, I was often asked why. For me the answer was always ‘follow the money’. Handel’s financial records provide a unique window on his career, musical environments, income, and even his health.

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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.

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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.

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Opening the machine learning black box

Andreas Joseph

Machine learning models are at the forefront of current advances in artificial intelligence (AI) and automation. However, they are routinely, and rightly, criticised for being black boxes. In this post, I present a novel approach to evaluate machine learning models similar to a linear regression – one of the most transparent and widely used modelling techniques. The framework rests on an analogy between game theory and statistical models. A machine learning model is rewritten as a regression model using its Shapley values, a payoff concept for cooperative games. The model output can then be conveniently communicated, eg using a standard regression table. This strengthens the case for the use of machine learning to inform decisions where accuracy and transparency are crucial.

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What’s in the News? Text-Based Confidence Indices and Growth Forecasts

Arthur Turrell, Nikoleta Anesti and Silvia Miranda-Agrippino.

As the American playwright Arthur Miller wrote, “A good newspaper, I suppose, is a nation talking to itself.” Using text analysis and machine learning, we decided to put this to test – to find out whether newspaper copy could tell us about the national economy, and in particular, whether it can help us predict GDP growth.

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How do bonus structures affect risk and effort choices? Insight from a lab experiment

Qun Harris, Analise Mercieca, Emma Soane and Misa Tanaka.

The bonus regulations were introduced based on the consensus amongst financial regulators that compensation practices were a contributing factor to the 2008-9 financial crisis. But little is known about how they affect behaviour in practice. So we conducted a lab experiment to examine how different bonus structures affect individuals’ risk and effort choices. We find that restrictions on bonuses, such as a bonus cap, can incentivise people to take less risk. But their risk-mitigating effects weaken or disappear once bonus payment is made conditional on hitting a high performance target. We also find some evidence that bonus cap discourages effort to search for better projects.

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A question of interest: Is UK household debt unsustainable?

Lewis Kirkham and Stephen Burgess.

UK household debt is high relative to income. But is it “unsustainable”? Some commentators say “it is”; others say “there is no reason to worry”. To investigate, we build a simple model of the economic relationships between household debt, house prices and real interest rates which we believe must hold in the long run. In our model there is no single threshold beyond which debt suddenly becomes unsustainable, but we argue that household debt should be broadly sustainable under any rise in real interest rates of up to about 2 percentage points (pp) from current levels. We also show that falling real interest rates may have contributed around 20-25pp to the rise in the household debt-to-GDP ratio since the 1980s.

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Simply is best: enhancing trust and understanding of central banks through better communications

David Bholat, Nida Broughton, Janna Ter Meer and Eryk Walczak

Clear communications are important for central banks at a time when their responsibilities have increased but trust in public institutions has declined. Using an online experiment with a representative sample of the UK population, our recent paper measured how differently styled summaries of the Inflation Report impacted public comprehension and trust in its policy messages. We find that a new ‘Visual Summary’ of the Inflation Report, which makes use of graphics and simpler language, increases understanding of policy messages. And making more changes using insights from behavioural science can further increase public understanding. These changes also somewhat increase people’s trust in the information.    Continue reading “Simply is best: enhancing trust and understanding of central banks through better communications”

Making big data work for economics

Arthur Turrell, Bradley Speigner, James Thurgood, Jyldyz Djumalieva, and David Copple

‘Big Data’ present big opportunities for understanding the economy.  They can be cheaper and more detailed than traditional data sources, and on scales undreamt of by survey designers.  But they can be challenging to use because they rarely adhere to the nice neat classifications used in surveys.  We faced just this challenge when trying to understand the relationship between the efficiency with which job vacancies are filled and output and productivity growth in the UK.  In this post, we describe how we analysed text from 15 million job adverts to glean insights into the UK labour market.

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