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.
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.
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.
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.
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.
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.
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.
“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?
Alastair Cunningham, David Bradnum and Alastair Firrell.
Uncertainty is a hot topic for economists at the moment. Have business leaders become more uncertain as a result of the EU referendum? If so, has that uncertainty had any effect on their plans? The Bank’s analysts look at lots of measures of economic uncertainty, from complex financial market metrics to how often newspaper articles mention it. But few of those measures are sourced directly from the trading businesses up and down the country whose investment and employment plans affect the UK economy. This blog reports on recent efforts to draw out what the Bank’s wide network of business contacts are telling us about uncertainty – comparing what we’re hearing now to trends seen in recent years.
Equity prices reflect the market value of public companies, making them an important indicator of the economy. In practice, stocks by firms listed on the local stock exchange serve as the ‘domestic’ equity benchmark but this might be misleading as an indicator of the national economy: stock markets track the performance of individual firms, including their international business. This makes it particularly challenging to extract a signal for the UK economy from UK equity prices, as the universe of UK-listed firms tends to be very global – for instance, around 2/3 of sales represented on the FTSE All-Share are generated abroad. So for a better read of the UK economy, I’ll look at a subset of more UK-focused stocks and other more domestically-focused UK equity indices.