Discussions on the connection between the level of interest rates, incentives to search for yield, and financial stability have been prominent over the last ten years or so. More recently, Larry Summers argued in his 2014 secular stagnation address that the decline in the real interest rates would be expected to increase financial instability. This column addresses the challenging issue of providing an explanation for the connection between these phenomena. An increase in the supply of savings that reduces equilibrium real rates can be associated with an increase in the risk of the banking system. This link can explain the emergence of endogenous boom and bust cycles.
David Martinez-Miera, Rafael Repullo, Monday, October 12, 2015 - 00:00
Carlos Garriga, Finn Kydland, Roman Šustek, Thursday, October 1, 2015 - 00:00
An important channel for monetary policy transmission is through mortgage markets. This column illustrates how the effects of an interest rate lift-off, from the zero lower bound, on homeowners depend on three factors: the prevalent mortgage type in the economy (fixed or adjustable rate), the speed of the lift-off, and the inflation rate during the lift-off. This channel of transmission suggests that if the purpose of the lift-off is to normalise nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincing signs of inflation taking off. Furthermore, the lift-off should be gradual and in line with inflation.
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, Tuesday, March 17, 2015 - 00:00
Charles A.E. Goodhart, Monday, March 2, 2015 - 00:00
Barry Eichengreen, Petra Geraats, Tuesday, January 6, 2015 - 00:00
Marcus Miller, Lei Zhang, Wednesday, September 10, 2014 - 00:00
Jonathan Bridges, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, Marco Spaltro, Tuesday, September 2, 2014 - 00:00
Richard Barwell, Jagjit Chadha, Sunday, August 31, 2014 - 00:00
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.
Jack McKeown, Lea Paterson, Friday, July 18, 2014 - 00:00
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.
Martin Weale, Tomasz Wieladek, Tuesday, June 10, 2014 - 00:00
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.
Oliver Harvey, George Saravelos, Wednesday, May 28, 2014 - 00:00
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.
David Cobham, Monday, September 16, 2013 - 00:00
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.
Spencer Dale, James Talbot, Friday, September 13, 2013 - 00:00
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.
Stephen Hansen, Michael McMahon, Sunday, August 11, 2013 - 00:00
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.
Anthony Hotson, Tuesday, April 23, 2013 - 00:00
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?
Stephen Grenville, Sunday, February 24, 2013 - 00:00
What would the overt monetary financing of fiscal deficits involve? This column explains the differences between “printing money”, quantitative easing, and overt monetary finance. Lord Turner’s proposed “helicopter drop” raises issues for banks’ balance sheets and central bank independence.
Charles A.E. Goodhart, Melanie Baker, Jonathan Ashworth, Tuesday, January 22, 2013 - 00:00
The Bank of England’s Governor-elect has argued for a switch to a nominal GDP target. This column points out problems with nominal GDP targets, especially in levels. Among other issues, nominal GDP targeting means that uncertainty surrounding future real growth rates compounds uncertainty on future inflation rates. Thus the switch is likely to raise uncertainty about future inflation and weaken the anchoring of inflation expectations.
David Miles, Tuesday, November 27, 2012 - 00:00
David Miles talks to Viv Davies about the conclusions of his recent research on quantitative easing and unconventional monetary policy. Miles discusses the different types of 'asset purchasing programmes' adopted by the Bank of England, the Fed and the ECB; they also discuss the importance of current research in these areas and the potential risks associated with quantitative easing. The interview was recorded at the Bank of England on 21 November 2012. [Also read the transcript]
Jean Pisani-Ferry, Guntram Wolff, Thursday, May 3, 2012 - 00:00
The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.
Michael A S Joyce, Matthew R Tong, Robert Woods, Tuesday, November 1, 2011 - 00:00
With the Bank of England recently announcing an additional £75 billion of quantitative easing, a reasonable question to ask is whether the last £200 billion has made any difference. This argues that QE may have helped boost real GDP by as much as 2% and inflation by 1.5%, similar to the effect from a drop in the base rate of around 300 basis points.