How have world shocks affected the UK economy?
Shiv Chowla, Lucia Quaglietti, Łukasz Rachel 26 November 2014
The importance of world shocks for the UK economy has been demonstrated by the events since 2007. This column suggests that world shocks are likely to have driven around two-thirds of the shortfall in output since 2007. Trade linkages are an important channel for the transmission of world shocks to the UK, but financial linkages and spillovers through uncertainty are likely to account for the majority of the impact.
The importance of world shocks for the UK since 2007
The importance of world shocks for the UK economy is well illustrated by the period since 2007. Over that time, world shocks such as the stresses in global financial markets over 2007–09, the steep fall and rise in global commodity prices over 2008–11 and, and since 2010 – the Eurozone crisis – have shaped macroeconomic developments in the UK (Armstrong et al. 2014).
Europe's nations and regions Global crisis
UK, output shocks, world shocks, VAR models
Trying to glimpse the ‘grey economy’
Charles A.E. Goodhart, Jonathan Ashworth 08 October 2014
Despite the growth of online and card payments, the ratio of currency to GDP in the UK has been rising. This column argues that rapid growth in the grey economy has been a key cause. The authors estimate that the grey economy in the UK could have expanded by around 3% of UK GDP since the beginning of the Global Crisis.
It is a remarkable fact that the ratio of currency to GDP in the UK has been rising, despite the greater use of card and online payments (see Figure 1). The currency-to-GDP ratio now stands at 16.1%, compared to 13.3% in Q4 2007. Currency in circulation per adult person is now equal to around £1,300 in the UK. In some other equivalent cases – e.g. holdings of US dollars, euros, and Swiss francs – this might be because more currency is being hoarded abroad, but this is not likely to be the case for the UK. So what is fuelling this rise in currency usage, if not the grey economy?
Europe's nations and regions Frontiers of economic research Global crisis
global crisis, underground economy, shadow economy, hidden economy, grey economy, black economy, measurement, Currency, UK, tax evasion, GDP, GDP measurement, national accounts
Real wages continue to fall in the UK
David Blanchflower, Stephen Machin 29 September 2014
Real wages continue to fall in the UK and elsewhere, yet despite this striking feature of the labour market, some commentators anticipate resurgent pay growth in the near future. This column argues that the absence of any improvement in the UK’s productivity performance – together with evidence that nominal wage growth is flatlining and real wage growth is falling – make it highly unlikely that wage growth is about to explode upwards.
Real wages continue to fall in the UK and elsewhere (Jowett et al. 2014). Yet this striking feature of the labour market still fails to register properly with some commentators. On 9 September 2014, Mark Carney, the Governor of the Bank of England, gave a speech at the 146th annual Trades Union Congress in Liverpool, where he argued as follows:
Europe's nations and regions Labour markets Productivity and Innovation
wages, UK, productivity, unions, union membership
Finance sector wages: explaining their high level and growth
Joanne Lindley, Steven McIntosh 21 September 2014
Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information.
Individuals who work in the finance sector enjoy a significant wage advantage. This wage premium has received increasing attention from researchers following the financial crisis, with focus being put onto wages at the top of the distribution in general, and finance sector wages in particular (see Bell and Van Reenen 2010, 2013 for discussion in the UK context). Policymakers have also targeted this wage premium, with the recent implementation of the Capital Requirements Directive capping bankers’ bonuses at a maximum of one year of salary from 2014.
Financial markets Microeconomic regulation
Bankers’ bonuses, banking, wages, Inequality, UK, regulation, asymmetric information, Executive compensation, Finance, task-biased technological change, ICT
Quantifying the macroeconomic effects of large-scale asset purchases
Karl Walentin 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Central banks have used various unconventional monetary policy tools since the onset of the financial crisis yet the debate continues regarding their efficiency. This column attempts to shed light on the ‘bang for the buck’, or the macroeconomic effects, of one such unconventional monetary policy – the Federal Reserve’s large-scale asset purchases of mortgage-backed securities employed during the Fed’s QE1 and QE3 programs.
Global crisis Monetary policy
monetary policy, unconventional monetary policy, large-scale asset purchases, central banking, financial crisis, Federal Reserve, quantitative easing, mortgage-backed securities, term premia, zero lower bound, interest rates, US, UK, Sweden, mortgages, global crisis
To exit the Great Recession, central banks must adapt their policies and models
Marcus Miller, Lei Zhang 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.
For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:
Global crisis Macroeconomic policy Monetary policy
Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy
The impact of capital requirements on bank lending
Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro 02 September 2014
Since the Global Crisis, support has grown for the use of time-varying capital requirements as a macroprudential policy tool. This column examines the effect of bank-specific, time-varying capital requirements in the UK between 1990 and 2011. In response to increased capital requirements, banks gradually increase their capital ratios to restore their original buffers above the regulatory minimum, reducing lending temporarily as they do so. The largest effects are on commercial real estate lending, followed by lending to other corporates and then secured lending to households.
The financial crisis has led to widespread support for greater use of time-varying capital requirements on banks as a macroprudential policy tool (see for example Yellen 2010 and Hanson et al. 2011). Policymakers aim to use these tools to enhance the resilience of the financial system, and, potentially, to curb the credit cycle. Under Basel III, national regulatory authorities will be tasked with setting countercyclical capital buffers over the economic cycle.
Macroprudential policy, capital requirements, regulation, bank regulation, BASEL III, Bank of England, financial crisis, bank lending, UK
The evolving effectiveness of UK’s monetary policy
Colin Ellis, Haroon Mumtaz, Pawel Zabczyk 06 August 2014
This column reports on empirical evidence showing that monetary policy shocks in the UK had a bigger impact on inflation, equity prices, and the exchange rate during the inflation targeting period. Related changes in the transmission of policy shocks to bond yields point to more efficient management of long run inflation expectations.
Over the past five decades, major industrialised economies underwent deep structural changes. These typically included dramatic shifts in macroeconomic policy and globalisation-induced changes in competition, technological advances, and financial innovation. This raises several concerns for policymakers, including whether the channels through which monetary policy affects the economy have changed over time, and what that might mean for how policy should be conducted.
Europe's nations and regions Monetary policy
inflation targeting, UK, policy shocks
It’s time to deploy macroprudential policy: results from the Centre for Macroeconomics July Survey
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan 08 July 2014
How should UK policy-makers respond to potential dangers to the economy from the housing market? As this column reports, a majority of respondents to the fourth monthly survey of the Centre for Macroeconomics (CFM) think that house price dynamics do pose a risk to the UK’s recovery; and that macroprudential tools rather than traditional interest rate policy should be deployed to deal with this risk.
The Centre for Macroeconomics (CFM) – an ESRC-funded research centre including the University of Cambridge, the London School of Economics (LSE), University College London (UCL) and the National Institute of Economic and Social Research (NIESR) – is today publishing the results of its fourth monthly survey.1 The surveys are designed to inform the public about the views held by leading UK-based macroeconomists on important questions about macroeconomics and public policy.
UK, housing market, Macroprudential policy
Revisiting the pain in Spain
Paul De Grauwe 07 July 2014
There has been a stark contrast between the experiences of Spain and the UK since the Global Crisis. This column argues that although the ECB’s Outright Monetary Transactions policy has been instrumental in reducing Spanish government bond yields, it has not made the Spanish fiscal position sustainable. Although the UK has implemented less austerity than Spain since the start of the crisis, a large currency depreciation has helped to reduce its debt-to-GDP ratio
The different macroeconomic adjustment dynamics in Spain – a member of a monetary union – and the UK – a stand-alone country – is stark. Paul Krugman popularised this contrast in his New York Times blog with the title “The Pain in Spain” (Krugman 2009, 2011), and commented on my own analysis in De Grauwe (2011).
Europe's nations and regions Global crisis Macroeconomic policy
ECB, monetary policy, euro, EMU, Spain, monetary union, fiscal policy, UK, government debt, austerity, EZ crisis, Outright Monetary Transactions, currency depreciation