Why are real interest rates so low? Secular stagnation and the relative price of investment goods

Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. I present an OLG model which explains these four trends with a fifth - the widespread fall in the relative price of investment goods. When capital goods are cheaper, a given quantity of saving buys more of them, but the resulting capital deepening lowers the marginal product of each one. Interest rates fall, reducing the user cost of housing, raise house prices and household debt. Preventing the accumulation of debt leads to a bigger fall in interest rates

Pushing on a string: US monetary policy is less powerful in recessions

We investigate how the response of the US economy to monetary policy shocks depends on the state of the business cycle. The effects of monetary policy are less powerful in recessions, especially for durables expenditure and business investment. The asymmetry relates to how fast the economy is growing, rather than to the level of resource utilization. There is some evidence that fiscal policy has counteracted monetary policy in recessions but reinforced it in booms. We also find evidence that contractionary policy shocks are more powerful than expansionary shocks, but contractionary shocks have not been more common in booms. So this asymmetry cannot explain our main finding

The banks that said no: banking relationships, credit supply and productivity in the UK

This paper uses a large firm-level dataset of UK companies and information on their pre-crisis lending relationships to identify the causal links from changes in credit supply to the real economy following the 2008 financial crisis. Controlling for demand in the product market, we find that the contraction in credit supply reduced labour productivity, wages and the capital intensity of production at the firm level. Firms experiencing adverse credit shocks were also more likely to fail, other things equal. We find that these effects are robust, statistically significant and economically large, but only when instruments based on pre-crisis banking relationships are used. We show that banking relationships were conditionally randomly assigned and were strong predictors of credit supply, such that any bias in our estimates is likely to be small

Will Brexit Age Well? Cohorts, Seasoning and the Age–Leave Gradient: On the Evolution of UK Support for the European Union

In the UK's 2016 Brexit referendum, young voters were more likely than their elders to support remaining in the European Union. Using half a century of data and new techniques, we find that recent cohorts tend to be more pro‐European than their predecessors, but that voters also become more sceptical towards Europe as they age. Much of the pro‐Europeanism of recent cohorts is associated with greater years of education. We also document large nationwide swings in sentiment that have little to do with age or cohort effects. These time effects are plausibly associated with, inter alia, macroeconomic fluctuations, financial conditions and geopolitical circumstances, but they also could have other sources. They dominate the impact of the estimated age and cohort effects and will crucially determine future UK support for membership in the European Union

Monetary policy transmission in an open economy:new data and evidence from the United Kingdom

This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing a high-frequency identification procedure. First, using local projections methods, we find that monetary policy has persistent effects on real interest rates and breakeven inflation. Second, employing our series of surprises as an instrument in a SVAR, we show that monetary policy affects economic activity, prices, the exchange rate, exports, and imports. Finally, we implement a test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), and find no evidence that either set of shocks contains any ‘endogenous’ response to macroeconomic variables

Foreign booms, domestic busts: The global dimension of banking crises

This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970-2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect

Step away from the zero lower bound: Small open economies in a world of secular stagnation

We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape has a beggar- thy-self effect, that may end up lowering welfare while eliminating underemployment. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counter- productive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation

Britain can promote private investment and economic growth. Here’s how

The UK investment ecosystem needs rewiring across the board to increase firms’ desire to invest in productive and sustainable assets, and to enhance their ability to do so. Paul Brandily, Mimosa Distefano, Krishan Shah, Gregory Thwaites and Anna Valero set out why this matters and what to do about it

The impact of Covid-19 on productivity

We analyse the impact of Covid-19 on productivity using data from an innovative monthly firm survey panel that asks for quantitative impacts of Covid on inputs and outputs. We find total factor productivity (TFP) fell by up to 5% during 2020-21. The overall impact combined large reductions in 'within-firm' productivity, with an offsetting positive 'between-firm' effects as less productive sectors, and less productive firms within them, contracted. Despite these large pandemic effects, firms' post-Covid forecasts imply surprisingly little lasting impact on aggregate TFP. We also see significant heterogeneity over firms and sectors, with the greatest impacts in those requiring extensive in-person activity. We also ask about unmeasured inflation in the form of deteriorating product quality, finding an additional 1.4% negative impact on TFP