Policymaking is invariably uncertain. I created a new index of ‘policymaker’s uncertainty’ based on a textual search of the minutes of the MPC meetings since 1997. The index is constructed by simply calculating the number of references to the word ‘uncertainty’ (and its derivatives, including ‘not certain’ and ‘far from certain’) as a share of the total word count. To avoid double-counting, it also excludes the Monetary Policy Summary that was introduced in 2015. One caveat of this approach is that it doesn’t distinguish instances of low or falling uncertainty from those where uncertainty was high. That aside, this measure can offer a new insight into uncertainty compared to indicators based on media references or business surveys.
Continue reading “Bitesize: What can the MPC minutes tell us about the policymaker’s uncertainty?”
Tamara Li, Nicola Shadbolt, Thomas Stratton and Gregory Thwaites
Consumption growth remained fairly steady in the immediate aftermath of the UK vote to leave the European Union in June 2016. But how did consumer expectations evolve in the first months after the referendum? We show with the Bank’s in-house household survey that ‘Leavers’ became more positive about the economy and their own financial situation after the referendum, with the opposite true for ‘Remainers’, and that this was reflected in spending by the two groups. But the size of the effect was small.
Continue reading “Voting with their wallets? Consumer expectations after the EU referendum”
Marko Melolinna and Srdan Tatomir
Uncertainty is in the spotlight again. And the MPC believe it is an important factor influencing the slowdown in domestic demand (August 2017 Inflation Report). Previous work by Haddow et al. (2013) has found a composite aggregate indicator of uncertainty combining several different variables that does appear to have explanatory power for GDP growth; but as Kristin Forbes notes these measures correlate better with consumption than investment. So in this blog post, we look at firm-level data to explore measures of uncertainty that matter for how firms invest in the United Kingdom. Our aggregate measure of uncertainty has a better forecast performance for investment than the composite aggregate indicator does.
Continue reading “How does uncertainty affect how UK firms invest?”
Ambrogio Cesa-Bianchi , Chris Redl, Andrej Sokol and Gregory Thwaites
Volatile economic data or political events can lead to heightened uncertainty. This can then weigh on households’ and firms’ spending and investment decisions. We revisit the question of how uncertainty affects the UK economy, by constructing new measures of uncertainty and quantifying their effects on economic activity. We find that UK uncertainty depresses domestic activity only insofar as it is driven by developments overseas, and that other changes in uncertainty about the UK real economy have very little effect.
Continue reading “Does domestic uncertainty really matter for the economy?”
Ian Webb, David Baumslag and Rupert Read.
One September morning, the Lord Mayor of London was called to inspect a fire that had recently started in the City. Believing that it posed little threat, he refused to permit the demolition of nearby houses, probably due to the expense of compensating the owners. The fire spread and ultimately destroyed most of the city. The Great Fire of London had begun. Only when the fire became too extensive to be readily halted did the full extent of the danger become evident. Financial regulators today face a similar challenge preventing financial crises- action causes significant costs to some but the consequences of inaction are much more uncertain. To combat this, we argue they should apply the precautionary principle.
Continue reading “How should regulators deal with uncertainty? Insights from the Precautionary Principle”
Alastair Cunningham, David Bradnum and Alastair Firrell.
Uncertainty is a hot topic for economists at the moment. Have business leaders become more uncertain as a result of the EU referendum? If so, has that uncertainty had any effect on their plans? The Bank’s analysts look at lots of measures of economic uncertainty, from complex financial market metrics to how often newspaper articles mention it. But few of those measures are sourced directly from the trading businesses up and down the country whose investment and employment plans affect the UK economy. This blog reports on recent efforts to draw out what the Bank’s wide network of business contacts are telling us about uncertainty – comparing what we’re hearing now to trends seen in recent years.
Continue reading “The U Word: What can text analytics tell us about how far uncertainty has risen during 2016?”
Angus Foulis and Saleem Bahaj
The macroprudential toolkit available to policymakers across several central banks is new and largely untested. For example, in the UK, the Bank of England’s Financial Policy Committee (FPC) has, since the financial crisis, received powers to alter bank capital requirements and to place restrictions on the terms of household mortgages for macroprudential purposes. These policy tools have not been used systemically in the past, so their impact and the FPC’s reaction function remain unclear. Moreover, in contrast to monetary policy, where price stability can be judged against inflation, the objective of macroprudential policymakers – the stability of the financial system – is inherently unobservable. Thus macroprudential policymakers face a high degree of uncertainty over the impact and effectiveness of their tools and a target variable they cannot perfectly observe.
Continue reading “Uncertainty is no excuse for not using macroprudential tools”
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 “On the benefits of reducing uncertainty about policy”