Exploitation of payday loan users: fact or fiction?

This paper explores the existence of different forms and underpinning reasons of exploitation at households level. The empirical analysis, based on data from the British Household Panel Survey (BHPS) collected for the purpose of understanding the social and economic change in Britain, aims to identify underpinning factors of mixed conclusions from empirical evidence on the existence of exploitation of payday loan users. This paper goes beyond traditional economic explanation and focuses on factors defining conditional relative advantage exploitation leading to voluntary exploitation. The results suggest that due to an “act in desperation”, current regulations on payday loan lending are powerless and cannot prevent households being voluntary exploited. In addition, results show that increased household financial burden and additional borrowing increase the likelihood of households to take a gamble in order to provide basic needs. The results provide more insight into why current policy regulations fail to tackle the problem of payday loan lending

The Effect of Payday Loans on Financial Distress in the UK

This paper proposes a model to examine the effect of unsecured payday loans to financial distress of low-income households and aims to open a discussion within academics and government on this topic. The theoretical model is based on the evidence from the British Household Panel Survey and interviews done by Consumer Focus which show that the proportion of households in debt problems has increased since 2000 particularly among young, economically active population. The increase in financial distress among British households is in coincidence with increasing revenue of payday loans, particularly after financial crisis. The proposed model aims to investigate the effect of payday loan usage on the financial distress while taking into consideration individuals’ economic austerity such as difficulty of paying mortgage, rent and utilities bills; household food insecurity; loss of job; and risk of debt spiral

An investigation of the two-way relationship between commodities and the UK economy in an environment of inflation targeting

This study investigates the sensitivity of the relationship between oil industrial inventories and oil supply at national, international and global levels to developments in monetary policy in the UK. More specifically, it provides evidence for the UK about the two-way relationship between monetary policy and commodity markets in an environment of inflation targeting. The importance of this research can be found in the provision of information which may be beneficial when projecting the economic outlook in general and inflation forecasts in particular. Although the UK operates under an inflation targeting framework, where supply shocks are considered as short-term, but recent movements in commodity markets are found to be more persistent, this study also investigates whether the sensitivity of the UK economy and policy makers to unanticipated movements in commodity prices has changed since the peak in commodity prices in 2008 which is coincident with the start of the financial crisis. The estimation of VEC models adjusted for the UK, and plotting impulse response functions is used to investigate the dynamic reaction of oil inventories and oil supply at national, international and global levels to the shock in monetary policy. Estimated SVAR models investigate the size of the persistent and transitory effects of different types of oil and food commodity shocks on the UK economy and the reaction of policy makers. Afterwards, the Chow test is used for the identification of potential structural breaks and the investigation of whether the sensitivity of the UK economy to shocks in commodity prices has changed. The results reveal that an expansionary UK monetary policy leads to a statistically significant decline in the OPEC oil supply while there is a less statistically significant effect on EU oil supply movements. Tight monetary policy is found to have the most significant effect on the UK’s industrial oil stocks and EU industrial oil stocks. The results also reveal that the world oil supply, as well as the OPEC oil supply, became less responsive to money supply and more responsive to interest rates after the Bank of England was given an operational independency. The responsiveness of the OECD oil stocks has also become slightly more responsive since the financial crisis. Following an investigation of the transitory and persistent effect of oil and food commodities shocks in relation to the nature of the shocks, the results reveal that shocks in oil prices pass through into the UK’s core inflation. It is also found that policy decisions in the UK are more sensitive to the actual shock in food prices than to the primary shock in food demand. The response of headline inflation to oil price shocks is found to be stronger before the oil price peak in 2008 and becomes less responsive afterwards while the response of core inflation to the shock in food prices is stronger after the price peak in 2008

The transmission of UK monetary policy across national borders: Investigation of the impact on oil prices

Does UK monetary policy affect world oil prices? Long term low interest rates and expansionary monetary policy enhanced by consequences of financial crisis are blamed for increases in oil prices. Therefore this paper explores the links between monetary policy changes and the volatility of oil prices. The aim is to identify the inventory and supply channels of transmission mechanism between UK monetary policy and oil market by estimating a SVAR model. Focusing primarily on UK monetary policy this paper contributes to an up-to-date evaluation of the effect of UK monetary policy shocks on oil prices at national, international and global level. Results show that UK monetary policy has statistically significant impact on oil prices through inventory channel at national and international level but small effect at global level. Although, surprisingly loose UK monetary policy has significant impact on OPEC oil supply rather than European oil supply. The contribution of the expansionary policy effect is sizeable and comparable with the effect of larger economies. Considering that the UK economy is set for a slow recovery with prognosis of low interest rates for the next years, particular attention must be paid to the transmission of monetary policy across national borders

World commodity prices and UK inflation indexes: Food for thought?

The dynamics of food price inflation have changed significantly. So, understanding them is important for policy not only in developing countries but also in developed countries like the UK. A question that has risen is the role, if any, of central banks in combating global food price inflation. The financial crisis and its negative consequences represent the primary problem for policy makers in stabilizing all economies. However the food crisis should not be forgotten since the dynamic of the structural problems of food prices have accelerated recently due to the problems associated with the financial crisis. As the financial crisis causes imbalances in financial markets and a liquidity trap for the banking sector, it also affects investments in agriculture in developing countries. Due to reduced growth, investment and productivity in developing countries, it is estimated that by 2020 rice prices will rise by 13 per cent, wheat by 15 per cent and maize by 27 per cent. Therefore, looking beyond the present crisis, we can expect other challenges to emerge, one of which is a possible resurgence in food and other commodity prices. This paper proposes a framework which views the recent rise in global food prices as a consequence of the global financial crisis and applies this approach to considering how the increasing prices of food products affect inflation targeting in the UK, cause inflation uncertainty and points out the weakness of Consumer Price Index (CPI) as a measure of inflation in the UK. Our results show that over the period 1970 – 2011, Granger causality tests reject the hypothesis that global food prices do not cause inflation in the UK, whereas the same hypothesis is not rejected for oil prices. Considering the rising trend of global food prices and that the contribution of food to a change in the UK’s CPI index in 2011 was 10 per cent, which makes it the most significant factor after housing and transport, opens a discussion about whether the declining weight of food prices in the UK’s CPI may disorient policy makers and lead to wrong decisions about interest rates. This paper has potential implications for future studies of the emerging challenges of monetary policy in the UK and may contribute to solving the problem of the exceeding of the inflation targeting tolerance bands in the UK by implementing a more accurate measure of inflation

What the financial crisis started, commodity prices will finish: new challenges to monetary policy in the UK

Consumer price inflation is increasingly tied to trends in commodity market prices and products imported from emerging economies and its nature is different from the past. Currently, the financial crisis and its negative consequences represent the primary problem for policy makers in stabilizing all economies. However, the food crisis should not be forgotten since the dynamic of the structural problems of commodity prices have accelerated recently. Therefore, looking beyond the present crisis, we can expect other challenges to emerge, one of which is a possible resurgence in increases in food and other commodity prices. Inspired by Boughton and Branson (1991), Sims (1992) and Hanson (2004), who identify the importance of the role of commodity prices in consumer price inflation in the USA during the 1980s, our study provides an up-to-date analysis of the ability of the food price index to improve inflation forecasts by reducing the forecast error over the period 1992 – 2012. The results of our stochastic model of the inflation forecast show that the inclusion of oil prices into the forecast significantly increases the forecast error while the inclusion of food prices reduces the forecast error. This paper has potential implications for future studies of the challenges of forecasting inflation in the UK and may also contribute to a greater understanding of the importance of food prices in the UK by bringing commodity prices back into the discussion