Quantifying the full impact of country-specific policies on trade flows

Rebecca Freeman, Mario Larch, Angelos Theodorakopoulos and Yoto V Yotov

Most economists rely upon the structural gravity model as a best tool to analyse the impact of trade policies on bilateral trade flows. However, while the gravity model is well suited to examine the impact of bilateral trade costs – such as tariffs imposed by exporter-importer pairs – it is poorly equipped to estimate the impact of country-specific policies because standard controls subsume their effects. This is problematic, as in practice many policy-relevant trade costs are country-specific. This post proposes a solution to this problem and discusses new methods to identify the full impact of country-specific characteristics within the structural gravity framework. A useful byproduct of our methods is that they deliver disaggregate trade elasticity estimates without the need for price/tariff data.

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What is a Bitcoin worth?

Thomas Belsham

The price of Bitcoin is currently around $57,000 (see Chart 1). But what is the price of Bitcoin based on? It’s just a bunch of code that exists only in cyberspace. It’s not backed by the state. There’s no recourse to a central authority. There’s no underlying asset, no stream of income. There’s just the thing itself. But does that mean it has no inherent worth? The code on which Bitcoin is based does give it scarcity value. Only 21 million Bitcoin will ever be created. And that might be worth something. That scarcity is why some people refer to Bitcoin as ‘digital gold’. But the very scarcity on which Bitcoin is based might also be its undoing. Its scarcity may even, ultimately, render Bitcoin worthless.

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Does regulation bite only the less profitable? Evidence from the too big to fail reforms

Tirupam Goel, Ulf Lewrick and Aakriti Mathur

Reforms following the 2008 financial crisis have led to significant increases in banks’ capital requirements. A large literature since then has focused on understanding how banks respond to these changes. Our new paper shows that pre-reform profitability is a vital, but often overlooked, driver of banks’ responses. Profitability determines the opportunity cost of shrinking assets, and underpins the ability to generate capital. We develop a stylised model which predicts that a more profitable bank would choose to shrink by less (or grow by more) compared to a less profitable bank in response to higher capital requirements. Combining textual analysis of banks’ annual reports with the assessment of a key too big to fail (TBTF) reform, we show that this prediction holds in practice.

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The structure of regulatory revolutions

Austen Saunders and Rajan Patel

What can the history and philosophy of science teach us about regulatory reform? In this post, we borrow Thomas Kuhn’s idea of ‘scientific revolutions’ to argue that radical overhauls of regulation often occur after crises but that, once major reforms have been completed, it’s normal to have periods when rules do not change so much. For instance, major reforms made to banking regulations after the Global Financial Crisis of 2007–08 are now coming to an end with future change likely to be more incremental. This post is about why different circumstances call for these different approaches to regulatory change.

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Impact of the UK QE on banks’ balance sheets

Mahmoud Fatouh

Quantitative easing (QE) involves creating new central bank reserves to fund asset purchases. Deposited in the reserves account of the seller’s bank, these reserves can have implications for banks’ asset mixes. In our paper, we use balance sheet data for 118 UK banks to empirically investigate whether the asset compositions of banks involved in the UK QE operations reacted differently in comparison to banks not involved in the initial rounds of QE between March 2009 and July 2012.

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Household debt and labour supply – a new labour market channel

Philip Bunn, Jagjit Chadha, Thomas Lazarowicz, Stephen Millard and Emma Rockall

Does higher household debt lead to greater labour supply? Ahead of the Global Financial Crisis (GFC), UK household debt rose considerably. Since that crisis, the UK labour market has experienced high employment and high participation, alongside relatively weak wage growth. Might these observations be evidence that higher debt leads to higher labour supply? In a recent Working Paper, we attempt to answer this question. We do find a significant channel by which households with higher debt increase their labour supply in response to negative income shocks by more than households with lower (or no) debt. But, we do not think the effect is strong enough to explain the post-crisis strength in employment and participation at the aggregate level.

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(Some of) The macroeconomics of working from home

John Lewis

Increased working from home (WFH) for public health reasons during the pandemic has spawned a debate about whether this shift might become permanent. In this post, I try to sketch out some of the (macro) economics of a longer-run post-pandemic shift towards more WFH. I argue that: i) on consumption, it won’t affect aggregate expenditure, it will just reallocate it across space and sectors ii) in property markets, effects hinge on supply responses; iii) for output, cost-savings to firms from cutting back office space don’t translate one-for-one into GDP gains.

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Did the Covid-19 local lockdowns reduce business activity in the UK?

James Hurley and Danny Walker

In 2020 governments around the world responded to Covid-19 (Covid) by introducing lockdown measures that were designed to slow the spread of the virus. Business activity fell materially. But it is difficult to isolate the impact of the local lockdown measures on business activity, given that business activity was affected by other factors such as voluntary social distancing at the same time. In this post we compare UK small and medium enterprises (SMEs) located close to the borders of – but not within – local lockdowns with similar businesses just inside, and conclude that the local lockdown measures causally reduced turnover growth by 8 percentage points relative to businesses outside of the lockdowns, driven by restaurants and non-food retail. Average turnover growth over the period was around -20%, which implies that the lockdowns accounted for only two fifths of the overall drop in business activity at most.

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