Prudential policies have grown in popularity as a tool for addressing financial stability risks since the 2007-09 global financial crisis. Yet their effects are still debated, with sanguine and more pessimistic viewpoints. In a recent Bank of England Staff Working Paper, we assess the extent to which emerging market (EM) prudential policies can partially insulate their domestic economies against the spillovers from US monetary policy. Using a database of prudential policies implemented by EMs since 2000, our estimates indicate that each additional prudential policy tightening can dampen the decline in total credit following a US monetary policy tightening by around 20%. This suggests that domestic prudential policies allow EMs to insulate themselves somewhat from global shocks.
As another year draws to an end, we wanted to take a look back at the blog in 2019. In case you missed any of them the first time round, the five most viewed posts for the year were:
- Handel and the Bank of England
- Houses are assets not goods: part 1 and part 2
- The ownership of central banks
- Opening the machine learning black box
- What happens when ‘angels fall’?
We hope you enjoyed the blog in 2019. Happy New Year and we look forward to you reading our posts in 2020!
Belinda Tracey, Managing Editor
Before Bank Underground goes off on its Christmas holidays, it’s time for the Annual Bank Underground Christmas Quiz! We hope you enjoy testing your knowledge on our festive themed questions on economics, finance and all things central banking…Continue reading “The Bank Underground Christmas Quiz”
Fernando Eguren-Martin and Andrej Sokol
Asset prices tend to co-move internationally, in what is often described as the ‘global financial cycle’. However, one such asset class, exchange rates, cannot by definition all move in the same direction. In this post we show how the ‘global financial cycle’ is associated with markedly different dynamics across currencies. We enrich traditional labels such as ‘safe haven’ and ‘risky’ currencies with an explicit quantification of exchange rate tail risks. We also find that several popular ‘risk factors’, such as current account balances and interest rate differentials, can be linked to these differences.Continue reading “Attention to the tail(s): global financial conditions and exchange rate risks”
Carsten Jung and Philippe Bracke
Whether in case of a breakup (Backstreet Boys), wondering why a relationship isn’t working (Mary J. Blige) or bad weather (Travis) – humans really care about explanations. The same holds in the world of finance, where firms increasingly deploy artificial intelligence (AI) software. But AI is often so complex that it becomes hard to explain why exactly it made a decision in a certain way. This issue isn’t purely hypothetical. Our recent survey found that AI already impacts customers – whether it’s calculating the price of an insurance policy or assessing a borrower’s credit-worthiness. In our new paper, we argue that so-called ‘explainability methods’ can help address this problem. But we also caution that, perhaps as with humans, gaining a deeper understanding of such models remains very hard.
Central banks the world over calculate and plot forecast fancharts as a way of illustrating uncertainty. Explaining the details of how this is done in a single blog post is a big ask, but leveraging free software tools means showing how to go about it isn’t. Each necessary step (getting data, building a model, forecasting with it, creating a fanchart) is shown as R code. In this post, a simple data-coherent model (a vector auto-regression or VAR) is used to forecast US GDP growth and inflation and the resulting fanchart plotted, all in a few self-contained chunks of code.
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.Continue reading “Handel and the Bank of England”
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.
David Bholat and Karla Martinez Gutierrez
Around the world, central banks have a number of different ownership structures. At one end of the spectrum are central banks, like the Bank of England, that are wholly owned by the public sector. At the other end are central banks, like the Banca d’Italia, whose shareholders are wholly private sector entities. And there are central banks, like the Bank of Japan, that lie in-between. But do these differences matter?
In this blog post, we explore the variety of central bank ownership structures, both historically and globally. We also suggest areas for future research on the topic.
Fergus Cumming and Alastair Firrell
When moving house, people often don’t move too far away. Many will be commuting to the same job or don’t want their kids to move school. But many people move long-distance when they sell one house and buy another.