Forward guidance in the UK
Spencer Dale, James Talbot 13 September 2013
The Bank of England’s Monetary Policy Committee has recently provided some explicit forward guidance regarding the future conduct of monetary policy in the UK. This column by the Bank's Chief economist explains how the MPC designed its forward guidance to respond to the unprecedented challenges facing the UK economy and argues that forward guidance allows the MPC to explore the scope for economic expansion without putting price and financial stability at risk.
At its meeting on 1 August 2013, the Monetary Policy Committee (MPC) agreed to provide state-contingent forward guidance concerning the future conduct of monetary policy. The aim was to provide more information to help financial markets, households and businesses understand the conditions under which the current stance of monetary policy would be maintained.
monetary policy, Central Banks, Bank of England, forward guidance
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
Publish or be damned – or why central banks need to say more about the path of their policy rates
Richard Barwell, Jagjit Chadha 31 August 2014
In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.
The central banking community has made significant steps to improve its communication strategy since the days of myth and mystique criticised by Alan Blinder in 1998:
“Greater openness is not a popular case in central banking circles, where mystery is sometimes argued to be essential to effective monetary policy…[but] a more open central bank, by contrast, naturally conditions expectations by providing the markets with information about its own view of the fundamental forces guiding monetary policy.”
Bank of England, forward guidance, unconventional monetary policy
Enhancing the transparency of the Bank of England’s Inflation Report
Jack McKeown, Lea Paterson 18 July 2014
The Bank of England has introduced a series of changes aimed at enhancing the transparency of its flagship communication vehicle for monetary policy – the Inflation Report. This column by two BoE economists sets the rationale for these changes in the context of the economic literature.
Nearly two decades ago, Alan Blinder used the Lionel Robbins lecture series at the London School of Economics to set out what, at the time, was a minority view on central bank communication – that greater transparency was a good thing, and would help central banks do a better job.1 That view is now widely accepted in mainstream macro thinking, and the past 20 years have seen a transformation in the way central banks communicate.
EU institutions Macroeconomic policy
Bank of England, Inflation Report
What are the macroeconomic effects of asset purchases?
Martin Weale, Tomasz Wieladek 10 June 2014
After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.
After policy rates fell close to zero in response to the global financial crisis of 2008-09, the scope for further conventional monetary policy easing was exhausted. As a result, both the Bank of England and the Federal Reserve embarked on large-scale asset purchases of government and financial securities (see Figures 1 and 2).
inflation, Federal Reserve, Phillips curve, Bank of England, quantitative easing, unconventional monetary policy, output
A well-designed sterling union will be needed if Scotland votes for independence
Oliver Harvey, George Saravelos 28 May 2014
Much ink has been spilled over Scotland’s currency options in the event of independence. This column argues that a breakup of the sterling area would be truly unprecedented. The sterling union is unique because it services a unitary state with a highly integrated and complex financial sector, an indivisible payments system, and an overlapping legal system. Politics aside, neither a unilateral nor a mutual break-up would be credible, leaving a negotiated currency union as the only option. However, as the Eurozone crisis demonstrates, a badly designed currency union could be exceptionally costly.
The currency options of an independent Scotland have become a crucial point of contention for both sides ahead of the September 2014 referendum. However, the debate has so far focused on the suitability of different regimes based on the optimal currency area framework or fiscal implications (Armstrong 2013). There has been little focus on the practical issues involved. This is problematic because a breakup of the sterling area would be historically unprecedented and uniquely complex.
Europe's nations and regions Monetary policy
monetary independence, currency union, Bank of England, Currency unions, Scotland, sterling, Scottish independence
Monetary policy in the UK: Time for change?
David Cobham 16 September 2013
The Bank of England is searching for an alternative activist monetary policy. This column argues that inflation targeting is better than previous frameworks but there is room for improvement. Faced with exchange rate and housing prices problems, the Bank was unable to modify the framework to suit. To avoid such problems, the Bank should be given more goal-independence as well as instrument-independence.
Before the Global Crisis it seemed as though the problems of monetary policy in the UK had been solved:
inflation targeting, Bank of England, UK, QE
Mark Carney and first impressions in monetary policy
Stephen Hansen, Michael McMahon 11 August 2013
Markets will be perusing the new Bank of England Governor’s comments for hints on his hawkishness. This column presents evidence showing that Monetary Policy Committee members tend to become more dovish as they become more experienced (i.e. after having participated in 18 or more meetings), with this tendency most marked in members with dovish preferences.
Much of modern monetary policy is concerned with managing inflation expectations. The establishment of independent central banks, the move to inflation targeting, and the more recent use of forward-guidance rules by some central banks all reflect the importance of managing inflation expectations. The change of senior central bank personnel, such as the appointment of a new Chairperson or Governor, is often a period of particular importance for anchoring inflation expectations.
Bank of England, Mark Carney, Hawk, Dove
Currency stabilisation and asset-price anchors: An examination of medieval monetary practices with some implications for modern policy
Anthony Hotson 23 April 2013
Medieval monetary practices reveal an alternative approach to currency stabilisation. This column examines the role of Mint prices as a device for stabilising the medieval bullion market. This might seem to be of limited relevance to managing modern currencies, yet a longer historical view helps to highlight different approaches to currency stabilisation. This raises a question for modern policymakers: should the price of some of the asset counterparts of today’s money be anchored, as bullion prices once were under the Mint system?
Mints as off-balance-sheet intermediaries
Bank of England, gold standard, Mint, bullion, consumer price index