EconStor Community: Bank of England, London
https://hdl.handle.net/10419/50637
Bank of England, London2024-03-28T20:57:16ZThe Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom
https://hdl.handle.net/10419/225045
Title: The Brexit vote, productivity growth and macroeconomic adjustments in the United Kingdom
Authors: Broadbent, Ben; Di Pace, Federico; Drechsel, Thomas; Harrison, Richard; Tenreyro, Silvana
Abstract: The UK economy has experienced significant macroeconomic adjustments following the 2016 referendum on its withdrawal from the European Union. This paper develops and estimates a small open economy model with tradable and non-tradable sectors to characterise these adjustments. We demonstrate that many of the effects of the referendum result can be conceptualised as news about a future slowdown in productivity growth in the tradable sector. Simulations show that the responses of the model economy to such news are consistent with key patterns in UK data. While overall economic growth slows, an immediate permanent fall in the relative price of non-tradable output (the real exchange rate) induces a temporary 'sweet spot' for tradable producers before the slowdown in tradable sector productivity associated with Brexit occurs. Resources are reallocated towards the tradable sector, tradable output growth rises and net exports increase. These developments reverse after the productivity decline in the tradable sector materialises. The negative news about tradable sector productivity also leads to a decline in domestic interest rates relative to world interest rates and to a reduction in investment growth, while employment remains relatively stable. As a by-product of our analysis, we provide a quantitative analysis of the UK business cycle.2019-01-01T00:00:00ZA trendy approach to UK inflation dynamics
https://hdl.handle.net/10419/173463
Title: A trendy approach to UK inflation dynamics
Authors: Forbes, Kristin; Kirkham, Lewis; Theordoridis, Konstantinos
Abstract: This paper uses a "trendy" approach to understand UK inflation dynamics. It focuses on the time series to isolate a low-frequency and slow-moving component of inflation (the trend) from deviations around this trend. We find that this slow-moving trend explains a substantial share of UK inflation dynamics. International prices are significantly correlated with the short-term cyclical movements in inflation around its trend, and the exchange rate is significantly correlated with movements in the slow-moving, persistent trend. Other variables emphasized in standard inflation models - such as slack and inflation expectations - may also play some role, but their significance varies and the magnitude of their effects is substantially smaller than for commodity prices and the exchange rate. These results highlight the sensitivity of UK inflation dynamics to events in the rest of the world. They also provide guidance on when deviations of inflation from target are more likely to be temporary, and when (and how quickly) a monetary policy response is appropriate.2017-01-01T00:00:00ZShocks versus structure: Explaining differences in exchange rate pass-through across countries and time
https://hdl.handle.net/10419/173464
Title: Shocks versus structure: Explaining differences in exchange rate pass-through across countries and time
Authors: Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
Abstract: We show that exchange rate pass-through to consumer prices varies not only across countries, but also over time. Previous literature has highlighted the role of an economy's "structure" - such as its inflation volatility, inflation rate, use of foreign currency invoicing, and openness - in explaining these variations in pass-through. We use a sample of 26 advanced and emerging economies to show which of these structural variables are significant in explaining not only differences in pass-through across countries, but also over time. The "shocks" leading to exchange rate movements can also explain variations in pass through over time. For example, exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher estimates of pass-through than those caused by demand shocks. The role of "shocks" in driving pass-through over time can be as large as that of structural variables, and even larger for some countries. As a result, forecasts predicting how a given exchange rate movement will impact inflation at a specific point in time should take into account not just an economy's "structure", but also the "shocks".2017-01-01T00:00:00ZCurrent account deficits during heightened risk: Menacing or mitigating?
https://hdl.handle.net/10419/173460
Title: Current account deficits during heightened risk: Menacing or mitigating?
Authors: Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
Abstract: Large current account deficits, and the corresponding reliance on capital flows from abroad, can increase a country's vulnerability to periods of heightened risk and uncertainty. This paper develops a framework to evaluate such vulnerabilities. It highlights the central importance of two financial factors: income on international investments and changes in the valuations of those investments. We show how the characteristics of a country's international investment portfolio - the size of its international asset and liability holdings, their currency denominations, their split between equity and debt exposures, and their return characteristics - affect the dynamics of these financial factors. Then we decompose those dynamics into their drivers and explore how they are affected by domestic and global risk. We apply this framework to ten OECD economies, showing the flexibility of this approach and how the countries' different international investment portfolios generate different dynamics in international investment income and positions. These examples, including a more detailed assessment based on an SVAR for the United Kingdom, show that a substantial degree of international risk sharing can occur through current accounts and international portfolios. Our framework clarifies which characteristics of a country's international portfolio determine whether a current account deficit is "menacing" or "mitigating".2016-01-01T00:00:00Z