Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.     

Impact of the Asset Purchase Programme on euro area government bond yields using market news

Assessing the impact on sovereign yields of the euro area Asset Purchase Programme (APP) is challenging, because the monetary policy announcement in January 2015 was already implicitly communicated to the market in the second half of 2014. To identify the APP effect, we construct an index which computes the intensity of this discussion in Bloomberg. The econometric results, which are based on real time vintages, suggest that the so-called stock effect with purchases worth about 10% of GDP reduced the GDP-weighted 10-year euro area sovereign yield by 72 basis points, which is equivalent to effects estimated for US and UK programmes, and much larger than those suggested by event studies for the euro area.     

WEALTH,ASSET PORTFOLIO,MONEY DEMAND AND POLICY RULE

I look at the linkages between monetary policy and asset wealth using quarterly data for the USA. I show that a positive interest rate shock leads to a fall in aggregate wealth and an important change in portfolio composition: housing wealth gradually decreases, but the effects are very persistent; and financial wealth quickly shrinks, but the impact is short‐lived. I also find that the money market can be characterized as follows: (i) the money demand has a large interest elasticity and a small output elasticity; and (ii) the estimated monetary policy reaction function highlights the special focus given by the central bank to developments in monetary aggregates. These features call for an approach whereby monetary authorities put more emphasis on tracking wealth developments, in particular, given the asset portfolio rebalancing between money holdings and financial and/or housing assets.     

Firm performance and labour turnover: Evidence from the 2004 workplace employee relations survey

We explore the impact of labour turnover on firm performance by analysing the predictions of an extension of the efficiency wage model of [Salop, S., (1979) ‘A Model of the Natural Rate of Unemployment’, American Economic Review, 69, 117–125.] developed by [Garino, G. and Martin, C., (2008) ‘The Impact of Labour Turnover: Theory and Evidence from UK Micro Data’, Quantitative and Qualitative Analysis in the Social Sciences, 1(3), 81–104.], which separates incumbent and newly hired workers in the production function. Within this theoretical framework, an exogenous increase in the turnover rate can increase profits if firms do not choose wages unilaterally. We test the theoretical predictions of the model using UK cross-section establishment-level data, the 2004 Workplace and Employee Relations Survey. In accordance with our theoretical priors, the empirical results support the standard inverse relationship between the quit rate and firm performance where firms unilaterally choose the wage and generally support a positive relationship between firm performance and the quit rate where trade unions influence wage setting.     

Does total-factor productivity drive housing prices? A growth-accounting exercise for four countries

Housing prices diverge from construction prices after 1997 in four major countries. Besides, total-factor productivity (TFP) differences between construction and the general economy account for the evolution of construction prices in the US and Germany, but not in the UK and Spain.     

Basel II procyclicality: The case of South Africa

This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) “financial accelerator” model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further amplifies the financial accelerator effect through the external finance premium channel, which, in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which, in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.     

How do central banks react to wealth composition and asset prices?

We assess the response of monetary policy to developments in asset markets in the euro area, the US and the UK. We estimate the reaction of monetary policy to wealth composition and asset prices using: (i) a linear framework based on a fully simultaneous system approach in a Bayesian environment; and (ii) a nonlinear specification that relies on a smooth transition regression model.     

Gross Investment And Technological Change

The impact of technological change upon gross investment has been relatively ignored. Building upon the foundations of the analysis of technological diffusion, an empirical model of gross investment is constructed that takes due account of technological change. This model is then tested upon a panel data set covering 185 UK firms over the period from 1984 to 1992. The results support the hypothesis that there are significant relationships of the expected signs between firm level gross investment, indicators of technological opportunity; the price of the capital goods that embody new technology, and firm and industry characteristics. There is also evidence of lagged adjustment effects in the investment process.     

Which News Moves the Euro Area Bond Market?

Abstract. This paper explores a long dataset (1999–2005) of intraday prices on German long-term bond futures and examines market responses to major macroeconomic announcements and ECB monetary policy releases. German bond markets tend to react more strongly to the surprise component in US macro releases compared with aggregated and national euro area and UK releases, and the strength of those reactions to US releases has increased over the period considered. We also document that the numbers of German unemployed workers consistently have been known to investors before official releases.     

THE EFFECT OF GOVERNMENT POLICY ON TOBACCO ADVERTISING STRATEGIES

This paper contributes to the very limited literature examining the factors determining tobacco companies' advertising strategies. The paper explores whether firms in the UK tobacco market significantly changed their advertising expenditure in the face of proposed changes to the UK and European Commission tobacco advertising legislation. The results suggest that changes in legislation have little impact on firms' advertising strategies for existing brands, but that legislative changes impact upon product launch dates. Our results also offer some information on the nature of firm interdependencies in the UK tobacco industry.     

Viewpoint: A microfoundation of monetary economics

Abstract .  In this lecture, I explain what the microfoundations of money are about and why they are necessary for monetary economics. Then, I review recent developments of a particular microfoundation of money, commonly known as the search theory of money. Finally, I outline some unresolved issues.     

The Impact Of Technology Adoption On Firm Productivity *

In this paper an attempt is made to theoretically and empirically explore the impact of technology adoption on firm output and productivity. The theory is based upon a modified Cobb Douglas production function with capital, labour and technology adoption as arguments. Three versions of the model with varying degrees of endogeneity are developed and then tested upon a data set relating to the adoption of five different process technologies by 217 firms in the UK engineering industry over the period 1981–1990. All the results indicate that technology adoption has a positive impact on output and productivity.     

UK INFLATION: PERSISTENCE, SEASONALITY AND MONETARY POLICY

In the light of the changes to UK monetary policy since the early 1980s, we study the existence and nature of changes in the properties of retail price inflation over this period. A feature of our analysis is the attention paid to the marked seasonal pattern of monthly UK inflation. After taking account of seasonality, both univariate and Phillips curve models provide strong evidence of changes in the level and persistence of inflation around the end of 1992, at the time of the introduction of inflation targeting. Indeed, all models point to the effective disappearance of inflation persistence after this date, implying that constant-parameter models estimated using both pre- and post-inflation targeting data periods should be treated with considerable caution.     

Parenthood and political engagement

This paper analyzes the impact of parenthood on political engagement using the longitudinal British survey data and a repeated cross-sectional European Social survey. I construct a political engagement measure by applying confirmatory factor analysis to observable indicators of several different aspects of political engagement. Then, I estimate the impact of becoming a parent on political engagement based on an event study around the birth of an individual’s first child, using UK data. The results indicate that having children reduces the political engagement of female parents but does not significantly affect the political engagement of male parents. The impact on women is temporary and disappears several years after the birth of their first child. The analysis of the impact of additional children on political engagement suggests that women’s political engagement is reduced by the fact of becoming a mother rather than by the number of children. The results are confirmed using repeated cross-sectional data for European regions, controlling for fixed regional characteristics. The policy implications of these findings are discussed.     

How Monetary Policy Affects Your Gross Domestic Product

During the financial crisis, monetary policy was loosened significantly. Debate continues about the extent to which low interest rates and quantitative easing (QE) may have had adverse distributional impacts, whether by income, wealth, age or region. Using quantified simulations on micro data, I show that looser monetary policy had a significantly positive financial impact on the majority of cohorts of UK society. The impact of monetary policy loosening on income and wealth inequality was small and the overall impact on household welfare significantly positive. These results differ from public perceptions of monetary policy. Personalised information on the impact of monetary policy on household balance sheets could help to correct these misperceptions.     

International macroeconomic dynamics: A factor vector autoregressive approach

In this paper international comovements among a set of key real and nominal macroeconomic variables in the US, UK, Canada, Japan and the Euro area have been investigated for the 1980–2005 period, using a factor vector autoregressive approach. We present evidence that comovements in macroeconomic variables do not concern only real activity, but are an important feature also of stock market returns, inflation rates, interest rates and, to a smaller extent, monetary aggregates. Both common sources of shocks and similar transmission mechanisms explain international comovements, with the only exception of Japan, where the idiosyncratic features seem to dominate. Finally, concerning the origin of global shocks, evidence of both global supply-side and demand-side disturbances is found.     

Trade credit, bank lending and monetary policy transmission

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow firms to access only financial markets or bank lending according to some net worth criterion. In our model we consider external finance from trade credit as an additional source of funding for firms that cannot obtain credit from banks. We predict that when monetary policy tightens there will be a reduction in bank lending relative to trade credit. This is confirmed with an empirical investigation of 16,000 UK manufacturing firms.     

A macroeconomic approach to the income-tax work-effort relationship

In this paper, we analyse the dynamic relationship between hours worked per employee (per self-employed) and marginal income tax-rate shocks in terms of both a comparative-dynamics model and a stochastic general equilibrium econometric model. The econometric model is estimated for Germany, UK and USA over the post-1960 period using the GMM estimation technique. Estimates in both models show that increases in the marginal income-tax rate exert negative effects on hours worked by both employees and the self-employed, but the response of the employees who are subject to tax withholding is stronger than the response of the self-employed.     

The animal spirits hypothesis and the Benhabib–Farmer condition for indeterminacy

This paper provides a self-contained review of the introduction of the animal spirits hypothesis into the infinite horizon optimal‐growth model. The analysis begins with an economic discussion of Pontryagin's maximum principles. Thereafter, I develop a version of the increasing-returns Benhabib–Farmer model by showing the possible sub-optimality of the central planner solution and deriving the bifurcation condition for indeterminacy. Moreover, I give some insights on how to model intrinsic and extrinsic uncertainty. Finally, analyzing the equilibrium condition of the labor market, I provide an intuitive rationale for the mechanism that in this model might lead prophecies to be self-fulfilling.     

Dichotomy between macroprudential policy and monetary policy on credit and inflation

This paper compares macroprudential policy and monetary policy using a simple New Keynesian model with credit. Macroprudential policy is effective in stabilizing credit with limited impact on inflation. Monetary policy stabilizes inflation, but is ‘too blunt’ for credit stabilization.