This post examines how policy in China supported the Chinese economy prior to the Covid-19 pandemic, drawing on a newly developed toolkit. This topic is particularly important for China, where economic developments have a significant impact on the rest of the global economy, but where assessing the full spectrum of policy – monetary, regulatory and fiscal – is difficult. Policy levers in China have evolved alongside a rapidly changing economy, and there is still some uncertainty surrounding which levers are being pulled – and how hard – at any given point in time. This post attempts to paint a clearer picture of Chinese policy by assessing key policy levers and their effects on growth.
Bruno Albuquerque, Martin Iseringhausen and Frédéric Opitz
The fall in aggregate demand due to the COVID-19 shock has brought the eight-year long US housing market expansion to a halt. At the same time, the Federal Reserve and the US Government have deployed significant resources to support households and businesses. These actions should help weather the ongoing crisis and lay the seeds for the next recovery. It is, however, highly uncertain how the post-COVID-19 housing recovery will look. Using a time-varying parameter (TVP) model on US aggregate data, our results suggest that the next housing recovery may exhibit similar features to the 2012-19 expansion: a sluggish response of housebuilding to rising demand, but a strong response of house prices.
How does the transmission of monetary policy depend on the distribution of debt in the economy? In this blog post we argue that interest rate changes are most powerful when a large share of households are financially constrained. That is, when a higher proportion of all borrowers are close to their borrowing limits. Our findings also suggest that the overall impact of monetary policy partly depends on the behaviour of house prices, and might not be symmetric for interest rate rises and falls.
Bruno Albuquerque, Knut Are Aastveit and André Anundsen
Housing supply elasticities – builders’ response to a change in house prices – help explain why house prices differ across location. As housing supply becomes more inelastic, the more rising demand translates to rising prices and the less to additional housebuilding. In a new paper, we use a rich US dataset and novel identification method to show that supply elasticities vary across cities and across time. We find that US housing supply has become less elastic since the crisis, with bigger declines in places where land-use regulation has tightened the most, and in areas that had larger price declines during the crisis. This new lower elasticity means US house prices should be more sensitive to changes in demand than before the crisis.
Children are expensive. Swings in families’ cash-flow can therefore move the dial on families’ decisions on whether and when to have a baby. For mortgaged families with an adjustable interest rate in 2008, the sharp fall in Bank Rate amounted to a windfall of around £1,000 per quarter in lower mortgage payments. In this post we show that people responded to this cash-flow boost by having more children. In total, we estimate that monetary policy increased the birth rate in the following three years by around 7.5%. That’s around 50,000 extra babies.
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.
When choosing a mortgage, a key question is whether to choose a fixed or variable-rate contract. By choosing the former, households are unaffected by official interest-rate decisions for the length of the fixation period. We can use transaction data on residential mortgages to get a sense of how long it takes interest-rate decisions to filter through to people’s finances.
According to conventional wisdom, a currency area benefits from internal labour mobility. If independent stabilisation policies are unavailable, the argument goes, factor mobility helps regions respond to shocks. Reasonable as it sounds, few attempts have been made to test this intuition in state-of-the-art macroeconomic models. In a recent Staff Working Paper (also available here), we build a DSGE model of a currency area with internal migration to go through the maths. So does the old intuition hold up? The short answer, we think, is yes. Internal labour mobility eases the burden on monetary policy by reducing regional labour markets imbalances. But policymakers can improve welfare by putting greater weight on unemployment. Effectively, interregional migration justifies a somewhat higher ‘lambda’.
As the UK economy went into recession in 2008, the Monetary Policy Committee responded with a 400 basis point reduction in Bank Rate between October 2008 and March 2009. Although this easing lessened the impact of the recession across the whole economy, its cash-flow effect would have initially benefited some households more than others. Those holding large debt contracts with repayments closely linked to policy rates immediately received substantial boosts to their disposable income. Cheaper mortgage repayments meant more pounds in peoples’ pockets, and this supported both spending and employment in 2009. In this article I explore one element of the monetary transmission mechanism that works through cash-flow effects associated with the mortgage market, and show that it can vary across both time and space.