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We were pleased to announce the publication of 8 new discussion papers recently:

DP466

"The fiscal and monetary determinants of sovereign bond yields in the Euro Area" by Jessica Baker, Oriol Carreras, Simon Kirby and Jack Meaning¹

Abstract: This paper investigates the determinants of sovereign bond yields in the Euro Area through the lens of the expectations hypothesis adjusting for measures of risk. This allows us to see the extent to which monetary policy, which controls the path of short-term nominal interest rates, is a driver of longer-term sovereign yields. To do this we include a forward-looking measure of expectations of overnight interest rates alongside debt-GDP in an error-correcting panel framework. We find that the expected path of the short-term nominal interest rate is a significant long-run determinant of 10 year sovereign bond yields in the Euro Area and that this relationship is robust to a wide range of alternative specifications and controls, especially in the Northern Euro Area economies. This result implies that the reduction in Northern Euro Area sovereign bond yields in recent years has been driven by the current and expected future loose stance of monetary policy. In the periphery economies this effect appears to have been dominated by other factors, such as default risk.

DP467

"The monetary and fiscal framework of the EMU in times of high debt and constrained interest rates" by Ian Hurst, Iana Liadze, and Jack Meaning

Abstract: This paper looks at the monetary and fiscal interaction in the European Monetary Union and how the two arms of macrostabilisation policy are affected by high levels of sovereign debt and short-term interest rates at, or around, their lower bound. Using the National Institute’s Global Econometric Model it shows that when one arm of policy is constrained then the other must do more work to act as a partial, yet imperfect substitute. With both binding fiscal constraints and short-term interest rates near the lower bound, monetary intervention in sovereign debt markets offers a channel by which to ease the monetary stance and simultaneously relax the fiscal budget constraint. When only a subset of the monetary union is fiscally constrained, a domestic fiscal expansion by the remaining unconstrained members can provide a cross-country intra-union offset that makes all member states better off than they otherwise would be.

DP468

"Fiscal Policy Spillovers" by Oriol Carreras, Simon Kirby, Iana Liadze, and Rebecca Piggott

Abstract: This paper uses the National Institute Global Econometric Model (NiGEM) to quantify the magnitude of fiscal spillover multipliers in each Euro Area country following a fiscal shock to one particular Euro Area country. Spillover multipliers lie between 0.01 and 0.3 per cent when the fiscal shock takes place in Germany. These estimates correlate with the degree of trade linkages between Euro Area countries and on the elasticity of imports to total final expenditure of each country. Our analysis suggests that fiscal spillovers arising from government spending measures are larger than those arising from changes in taxation. Our fiscal spillover estimates increase by 20 to 50 per cent when the proportion of liquidity constrained agents increases by 25 per cent, our proxy for a “crisis time” scenario. We find that fiscal multipliers increase and fiscal spillovers decrease when we decompose total final expenditure in our import equations to allow for varying import intensities across its components.

DP469

"Quantifying Fiscal Multipliers" by Oriol Carreras; Simon Kirby, Iana Liadze, and Rebecca Piggott

Abstract: This paper uses the National Institute Global Econometric Model (NiGEM) to quantify the magnitude of fiscal multipliers in each Euro Area country when fiscal policies are enacted in each country in isolation and when there is international coordination of fiscal policies. We find that fiscal multipliers are usually below 1 when countries implement fiscal policies in isolation. By contrast, multipliers increase significantly, on average by 50 to a 100 per cent depending on the fiscal instrument, when there is international coordination of fiscal policies. Our analysis suggests that fiscal multipliers arising from government spending measures are larger than those arising from changes in taxation. These estimates correlate with the degree of openness to trade of each country, the sensitivity of aggregate consumption to fluctuations in short-term income and country size. We also find that fiscal multipliers increase with the proportion of liquidity constrained agents.

DP470

"Macroprudential tools, transmission and modelling" by Oriol Carreras; Davis, P and Rebecca Piggott

Abstract: The purpose of this paper is twofold. First, we review the theoretical and empirical literature on macroprudential policies and tools. Second, we test empirically the effectiveness of several macroprudential policies and tools using three datasets from the IMF and BIS that cover up to 19 OECD countries during 2000-2014, thus giving wide coverage of instruments. In addition, our focus on OECD countries gives us access to a wider range of control variables whose omission may lead to excessively favourable results on the impact of macroprudential policies. We find evidence that macroprudential polices are effective at curbing house price and credit growth, albeit some tools are more effective than others. These include, in particular, taxes on financial institutions and strict loan-to-value and debt-to-income ratio limits.

DP471

"Finance and Credit in a Model of Monetary Policy" by Jagjit Chadha and Y-K Yang

Economies is the extent to which a workhorse advanced economy model can yield important insights for monetary policy-making. We note that the standard sticky-price, monopolistically competitive model does not allow analysis of money and credit dynamics and led to a concentration of research on simple interest rate reaction functions. Time-varying financial frictions tend to act as a tax on intermediation activities and so can vary output in a significant manner. In this paper, we consider the implications of financial frictions for baseline monetary policy using a model calibrated on Indian data and find that a simple interest rate reaction function may not be welfare maximising.

DP472

"The New Art of Central Banking" by Jagjit Chadha

This article outlines some of the intellectual lessons learnt by central bankers during the financial crisis. The key question is whether a broader range of policy options than simple inflation targeting has to be considered in order to limit instability. Interactions with overseas pools of savings, government debt markets and financial risk have all conspired to complicate significantly the task of monetary policymaking. These developments do not mean that the target for inflation has to be modified or dropped but that setting policy will be a more complex task and require more explanation than it has in the recent past.

DP473

"The UK Economy in the Long Expansion and its Aftermath" by Jagjit Chadha et al

In the aftermath of the inflation and recessions of the 1970s and early 1980s, from the early 1990s onwards there was a major upswing in most advanced countries. In the UK it was the longest period of economic expansion on record. But it came to an abrupt end in 2007, with the freezing of the interbank markets and the collapse of Northern Rock, followed in 2008 by Bear Stearns and Lehman Brothers. 

Before the crisis, many economists had begun to call this period of upswing the Great Moderation; and, echoing developments in other disciplines such as political thought, some openly wondered whether we had found the answer to the questions that had perennially been posed by “boom and bust”.  But given the magnitude of the shocks that hit the global economy in the crisis period of 2007-8 (and since then in a number of countries) the apparent reduction in macroeconomic volatility of the earlier period now appears, with the benefit of hindsight, to have been largely illusory. We therefore argue that the period 1992-2007 can more accurately (and less ambitiously) described as the Long Expansion – hence the title of this volume. 

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