NIESR Discussion Paper

The Role of Financial Policy

I review the contribution and influence of Milton Friedman’s 1968 presidential address to the American Economic Association. I argue that Friedman’s influence on the practice of central banking was profound and that his argument in favour of monetary rules was responsible for thirty years of low and stable inflation in the period from 1979 through 2009.

Implementing Macroprudential Policy in NiGEM

In this paper we incorporate a macroprudential policy model within a semi-structural global macroeconomic model, NiGEM. The existing NiGEM model is expanded for the UK, Germany and Italy¹ to include two macroprudential tools: loan-to-value ratios on mortgage lending and variable bank capital adequacy targets. The former has an effect on the economy via its impact on the housing market while the latter acts on the lending spreads of corporate and households.

Effects of asset purchases and financial stability measures on term premia in the euro area

We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area in the wake of the global financial crisis and the euro area sovereign debt crisis on ten-year government bond term premia in eleven euro area countries. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures.

The Impact of Management Practices on SME Performance

We examine the impact of management practices on firm performance among SMEs in Britain over the period 2011-2014, using a unique dataset which links survey data on management practices with firm performance data from the UK’s official business register.

The Household Fallacy

We refer to the idea that government must ‘tighten its belt’ as a necessary policy response to higher indebtedness as the household fallacy. We provide a reason to be skeptical of this claim that holds even if the economy always operates at full employment and all markets clear. Our argument rests on the fact that, in an overlapping-generations (OLG) model, changes in government debt cause changes in the real interest rate that redistribute the burden of repayment across generations.

Consumption Dynamics, Housing Collateral and Stabilisation Policies: A Way Forward for Policy Co-Ordination?

We decompose aggregate consumption of heterogeneous consumers by modelling both savers and their links to collateral constrained borrowers through a bank which prices credit risk. Savers own both firms and the commercial bank while borrowers require loans from the commercial bank to effect their consumption plans. The bank lends at a premium over the interest rate on central bank money in proportion to the riskiness of loans, the demand for loans, the asset price and the quantity of housing collateral.

Pricing Assets in a Perpetual Youth Model

This paper constructs a general equilibrium model where asset price fluctuations are caused by random shocks to beliefs about the future price level that reallocate consumption across generations. In this model, asset prices are volatile, and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption.

Did Central Banks Cause The Last Financial Crisis? Will They Cause The Next?

Recent history suggests that raising interest rates higher than warranted by macroeconomic prospects would not be the right policy for financial stability. The significant tightening of monetary policies in the advanced economies from mid-2004 to mid-2006 failed to stop increased risk-taking in the financial system. The pre-GFC policy failure was not lax monetary policy but the failure of regulators to address (and markets to sanction) new risks created by innovation in international banks.

Peer Effects and Social Influence in Post-16 Educational Choice

This paper investigates whether the educational choices that young people make after the completion of their GCSEs (at age 16) are influenced by their peers. More specifically, it takes advantage of the variation in peer groups that arises when students move from primary to secondary school in order to isolate the impact of secondary school peers on the choice of educational trajectory. These trajectories are broadly classified as academic, vocational, a combination of the two, or no education at all.

Central bank swap lines and CIP deviations

We study the use of US dollar central bank swap lines as a tool for addressing dislocations in the foreign currency swap market against the USD since the global financial crisis. We find that the use of the Federal Reserve’s USD central bank swap lines was mainly related to tensions in US money markets during times of financial crisis, and less to tensions which were confined to foreign exchange swap markets.

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