What matters to firms? New insights from survey text comments

Ivan Yotzov, Nick Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka and Greg Thwaites

Text data is often raw and unstructured, and yet it is the key means of human communication. Textual analysis techniques are increasingly being used in economic and financial research in a variety of different ways. In this post we apply these techniques to a new setting: the text comments left by respondents to the Decision Maker Panel (DMP) Survey, a UK-wide monthly business survey. Using over 20,000 comments, we show that: (i) these comments are a rich and unexplored data source, (ii) Brexit has been the dominant topic of comments since 2016, (iii) text-based indices match existing uncertainty measures from the DMP at both the aggregate and firm level, and (iii) sentiment among UK firms has been declining since 2016.

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Uncertainty and voting in monetary policy committees

Alastair Firrell and Kate Reinold

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.

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Cloudy with a chance of tariffs: the impact of policy uncertainty on the global economy

Ed Manuel, Alice Pugh, Anina Thiel, Tugrul Vehbi and Seb Vismara

Average tariffs on goods traded between the US and China increased by 15 percentage points from early 2018 to 2019. By making it more costly to buy goods from abroad, higher tariffs have reduced global trade flows and spending by households and businesses. But ‘direct’ effects of tariffs are not the only ways in which trade-related issues can affect global growth. Trade-related uncertainty has risen sharply since the escalation of trade tensions in 2018, which may have caused businesses to postpone costly investment decisions and financial conditions to tighten. In this post we investigate the size of these ‘indirect’ channels.

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Economic uncertainty before and during the COVID-19 pandemic

Dave Altig, Scott Baker, Jose Maria Barrero, Nick Bloom, Philip Bunn, Scarlet Chen, Steven J. Davis, Julia Leather, Brent Meyer, Emil Mihaylov, Paul Mizen, Nick Parker, Thomas Renault, Pawel Smietanka and Greg Thwaites.

The unprecedented scale and nature of the COVID-19 crisis has generated an extraordinary surge in economic uncertainty. In a recent paper we review what has happened to different indicators of uncertainty in the US and UK before and during the COVID-19 pandemic. Three results emerge. All of the indicators that we consider show huge jumps in uncertainty in reaction to the pandemic and its economic fallout. Most indicators reach their highest values on record, although the extent of the increases differ. The time paths also differ: implied stock market volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices partly recovered. In contrast, broader measures peaked later.

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Bitesize: What can the MPC minutes tell us about the policymaker’s uncertainty?

Michal Stelmach

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.

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Voting with their wallets? Consumer expectations after the EU referendum

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.

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How does uncertainty affect how UK firms invest?

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.

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Does domestic uncertainty really matter for the economy?

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.

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How should regulators deal with uncertainty? Insights from the Precautionary Principle

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.

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The U Word: What can text analytics tell us about how far uncertainty has risen during 2016?

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.

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