Could the slow response of deposit rates to changes in monetary policy strengthen its impact on the economy? At first look, the answer would probably be ‘no’. Imperfect pass-through of policy to deposit rates means that the rates on a portion of assets in the economy respond by less than they could. But what if this meant that the rates on other assets responded by more? In a recent paper, I develop a model that is consistent with a number of features of banks’ assets and liabilities and find that monetary policy has a largereffect on economic activity and inflation if the pass-through of policy to deposit rates is partial.
Stephen Millard, Margarita Rubio and Alexandra Varadi
The 2008 global financial crisis showed the need for effective macroprudential policy. But what tools should macroprudential policy makers use and how effective are they? We examined these questions in in a recent staff working paper. We introduced different macroprudential tools into a dynamic stochastic general equilibrium (DSGE) model of the UK economy and compared their impact on the economy and household welfare, as well as their interaction with each other and with monetary policy. We found that capital requirements reduce the effects of financial shocks. Instead, a limit on how much of borrowers’ income is spent on mortgage interest payments reduces the volatility of lending, output and inflation resulting from housing market shocks.
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.
The Bank of England co-organised a ‘History and Policy Making Conference‘ in late 2020. This guest post by Nathan Sussman, Professor of International Economics at the Graduate Institute of Geneva, is based on material included in his conference presentation.
There is ample evidence that a monetary policy tightening triggers a decline in consumer price inflation and a simultaneous contraction in investment and consumption (eg Erceg and Levin (2006) and Monacelli (2009)). However, in a standard two-sector New Keynesian model, consumption falls while investment increases in response to a monetary policy tightening. In a new paper, we propose a solution to this problem, known as the ‘comovement puzzle’. Guided by new empirical evidence on the relevance of frictions in credit provision, we show that adding these frictions to the standard model resolves the comovement puzzle. This has important policy implications because the degree of comovement between consumption and investment matters for the effectiveness of monetary policy.
The right stance for monetary policy is highly uncertain, and so it is no surprise that members of monetary policy committees – like the Bank of England’s Monetary Policy Committee (MPC) – regularly disagree about the best course of action. Asking a committee to decide allows different opinions to be aired and challenged, with a majority vote needed to determine policy. But how should we expect those disagreements and votes to change in periods of higher uncertainty? Should we expect more 9–0 unanimous votes? Or more 5–4 close contests? We address these questions in this post and find that the degree of disagreement is little changed in periods of high uncertainty, and nor are dissenting votes. There is, however, some difference in how voting decisions are formed when uncertain, with both individual and committee-wide views having less explanatory power for votes.
Robert Hills, Simon Lloyd, Rhiannon Sowerbutts, Dennis Reinhardt, Matthieu Bussière, Baptiste Meunier and Justine Pedrono
Large amounts of capital flow across borders. But these can be destabilising. So can recipient countries employ prudential policies to offset monetary policy changes in centre countries? And does it matter where sending banks are located? Our findings suggest it does. Our case study of French banks operating in London – part of a broader international initiative – suggests prudential policies have a much bigger offsetting effect on French banks’ lending out of the UK’s financial centre than on their lending out of headquarters in France. In line with those observations, we uncover evidence of a ‘London Bridge’ in cross-border lending: the way French banks channel funds to the UK is responsive to prudential policies in the rest of the world.
The Covid shock has created substantial and unprecedented challenges for monetary policymakers. This post summarises the key literature on the immediate monetary policy response to the shock, including both tools and short to medium-term strategy issues (but leaving aside the longer-term question of fiscal-monetary interactions).
It has been well established that macroeconomic outcomes, such as recessions and unemployment, can have important impacts on households’ well-being. So it follows that monetary policy decisions can affect happiness too. In a recent working paper we use a novel approach to assess how the unprecedented loosening in monetary policy in response to the 2008 global financial crisis affected the well-being of UK households. The framework we use could be used to assess the welfare implications of other monetary policy responses, including to the spread of Covid-19 during 2020.
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.