Bond financing conditions and economic activity in the UK: aggregate and firm-level evidence

Eduardo Maqui, Nicholas Vause and Márcia Silva-Pereira

In recent decades, the corporate bond market has grown from a relatively niche source of finance for UK corporations to a central pillar alongside bank loans. This transition raises an important question: as with bank credit conditions, have supply conditions in the corporate bond market come to significantly affect UK economic activity? Our recent research suggests the answer is a resounding yes. We show that a measure of corporate bond financing conditions − the Excess Bond Premium (EBP) − not only anticipates macroeconomic outturns in the UK, but also influences investment by UK firms, especially those that are highly leveraged and more reliant on bond finance.

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International spillovers from climate policy

Francesca Diluiso and Aydan Dogan

To achieve the emissions reduction targets outlined in The Paris Agreement, many economies have started implementing various types of climate policies. These policies, which include subsidies for green production or investment, carbon taxes, and cap and trade schemes, are crucial for guiding the transition to a greener economy. However, by altering the cost and the emission intensity of domestically produced goods, they may have an impact on inflation, output, and international trade flows. This blog post explores the spillover effects due to the implementation of climate policy in a single country. We examine two major types of policies currently implemented and discussed worldwide: green subsidies and carbon taxes.

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Beyond emissions: the interplay of macroprudential regulation and climate policy

Francesca Diluiso, Barbara Annicchiarico and Marco Carli

While climate change is often seen as a long-term concern, climate mitigation policies can have different short-term effects, since they affect the transmission mechanism of conventional macroeconomic shocks. In a new working paper, we show that cap-and-trade schemes lead to lower volatility in GDP and financial variables, and result in reduced welfare costs of the business cycle, when compared to the more widely known carbon taxes. As we find that these welfare differences are primarily driven by distortions in financial markets, we argue that countercyclical macroprudential regulation, even without any green-biased component, can effectively align the welfare performance of these policies and mitigate their short-run costs.

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Great Expectations: the economic power of news about the future

Silvia Miranda-Agrippino, Sinem Hacioglu Hoke and Kristina Bluwstein

Can shifts in beliefs about the future alter the macroeconomic present? This post summarizes our recent working paper where we have combined data on patent applications and survey forecasts to isolate news of potential future technological progress, and studied how macroeconomic aggregates respond to them. We have found news-induced changes in beliefs to be powerful enough to enable economic expansions even if different economic agents process these types of news in very different ways. A change in expectations about future improvements in technology can account for about 20% of the variation in current unemployment and aggregate consumption.

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