Tag Archives: monetary policy

Do consumers respond in the same way to good and bad income surprises?

Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico.

If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size.

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The surprise in monetary surprises: a tale of two shocks

Silvia Miranda-Agrippino.

Empirical identification of the effects of monetary policy requires isolating exogenous shifts in the policy instrument that are distinct from the systematic response of the central bank to actual or foreseen changes in the economic outlook. Because the same tools are used to both induce changes in the economy, and to react to them, distinguishing between cause and effect is a far from trivial matter.  One popular way is to use surprises in financial markets to proxy for the shock. In a recent paper, we argue that markets are not able to distinguish the shocks from the systematic component of policy if their forecasts do not align with those of the central bank. We thus develop a new measure of monetary shocks, based on market surprises but free of anticipatory effects and unpredictable by past information.

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Filed under Financial Markets, Macroeconomics, Monetary Policy

The Nightmare before Christmas: Financial crises go global in 1857

Tobias Neumann.

A railway boom in America’s Midwest goes spectacularly bust.  Sixty-two of New York’s commercial banks close – out of sixty-three. Meanwhile in Britain, a decade gilt-edged by gold discoveries in Australia and fuelled by the Crimean War was beginning to lose its lustre.  Thus the scene was set for the first global financial crisis shaking markets in New York, London, Paris and across the world.  A crisis so severe it forced the Bank of England to “break the law” to survive.

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Filed under Banking, Economic History, Financial Stability, Macroeconomics

Bitesize: Has the FOMC increased its focus on foreign risks?

Dan Wales and Emil Iordanov.

Have FOMC discussions changed since the end of 2015? Are the committee more concerned about international risks now?

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Filed under Bitesize, International Economics, Macroeconomics, Monetary Policy

Have reforms to the BOE’s operating framework reduced money market volatility, and does this matter for monetary policy transmission?

Matthew Osborne.

Over the last twenty years, the BOE has carried out a number of reforms to its operational framework which have been partly intended to reduce money market volatility.  My analysis suggests that these have been successful. Overnight volatility fell by around 90% since the early 2000s and much of this can be explained by the BOE’s reforms.  But I find little evidence that this affected the volatility of term rates, which are more important than overnight rates for monetary policy transmission.  Therefore, central banks might consider giving less priority to money market volatility when designing their future operating frameworks.

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Filed under Financial Markets, Monetary Policy

How financial variables can help in identifying the output gap in the UK

Marko Melolinna.

Like in most advanced economies, output fell significantly in the UK in the aftermath of the financial crisis. There is an ongoing debate on to what extent this fall could be explained by output having grown above its sustainable level; in other words, was there a positive output gap before the crisis? I argue that using financial market indicators in addition to more traditional macroeconomic variables to explain output fluctuations helps in constructing a consistent real-time narrative of a positive pre-crisis output gap in the UK.

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On the benefits of reducing uncertainty about policy

Riccardo M Masolo and Francesca Monti.

Newspapers and other media outlets regularly speculate about what the Bank of England might do in response to current economic conditions. Curiously, however, most of the models we use to carry out our economic and policy analysis completely disregard this type of uncertainty. Many of them consider how people would behave when uncertain about the state of the economy, yet everyone is assumed to know for sure the variables that the central bank will respond to, how aggressively and why. To try and fill this gap between the models we typically use and the reality we actually face, in our paper we explore the effects of Knightian uncertainty about the behaviour of the policymaker in an otherwise standard macro model. Continue reading

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Filed under Macroeconomics, Monetary Policy, New Methodologies

Human capital depreciation during unemployment – does it matter for monetary policy?

Lien Laureys

In many countries the great recession that followed the financial crisis led to sharp rises in not only the rate, but also the duration of unemployment.  These were bad in themselves, but many were further worried that because lengthy unemployment spells are thought to erode workers’ human capital, productive potential would be damaged.  The question I ask is whether this should affect the conduct of monetary policy. The short answer is no. But it may still be a question worth exploring further.

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Did Quantitative Easing boost bank lending?

Nick Butt, Rohan Churm & Michael McMahon 

When faced by a slowing economy and contracting credit what policy should be used?  There is a body of evidence to suggest that QE is an effective means to boosting asset prices, aggregate demand and inflation, but it’s far less clear whether it improves the flow of credit to the economy.  In theory, increases in deposit funding caused by such purchases might lead banks to increase lending.  In this post we explore how this might occur.  But we find no evidence that this happened in the UK.  This may reflect the fact that QE worked instead through a so called ‘portfolio rebalancing channel’ and that the resulting churn in banks’ deposit funding stopped any such channel from operating. Continue reading

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Filed under Banking, Macroeconomics, Monetary Policy

Estimating and interpreting term premia in UK government bond yields: global influences on a small open economy

Iryna Kaminska, Andrew Meldrum and Chris Young

Since March 2009, UK long term rates have moved around a lot – as shown in Figure 1 – despite Bank Rate being held fixed. To understand these movements you need to understand term premia.  In this blog, we suggest that much of the movement in term premia reflects global factors.

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Filed under Financial Markets, International Economics, Monetary Policy