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July 2018 newsletter – The Bank of England’s One Bank Research Agenda: An update

In the April 2015 edition of this Newsletter, Stephen Millard discussed the launch of the Bank of England’s ‘One Bank Research Agenda’. This article gives an update on Bank of England research since the launch, lays out the Bank’s current research themes and discusses ways in which the Bank of England continues to increase its engagement with the academic community.

The Bank’s One Bank Research Agenda

In February 2015, the Bank launched its One Bank Research Agenda based around five themes:

• Central bank policy frameworks and the interactions between monetary policy, macroprudential policy and microprudential policy, domestically and internationally
• Evaluating regulation, resolution and market structures in light of the financial crisis and in the face of the changing nature of financial intermediation
• Operationalising central banking: evaluating and enhancing policy implementation, supervision and communication
• Using new data, methodologies and approaches to understand household and corporate behaviour, the domestic and international macroeconomy, and risks to the financial system
• Central bank response to fundamental technological, institutional, societal and environmental change

These five themes were discussed in more detail in an accompanying document.1

Some examples….

Since launching the research agenda, Bank researchers have made progress on each of the themes, publishing their research as Bank of England Staff Working Papers2 and in journals3 as well as in the Bank’s Bank Underground4 blog.

In terms of ‘the interactions between monetary, macroprudential and microprudential policy’, two particular examples of the research we have done are the Staff Working Papers on ‘Targeting financial stability: Macroprudential or monetary policy?’5 by David Aikman, Julia Giese, Sujit Kapadia and Michael McLeay and ‘Concerted efforts? Monetary policy and macroprudential tools’6by Andrea Ferrero, Richard Harrison and Ben Nelson, which were both published earlier this year. In the former, the authors develop a calibrated New Keynesian macroeconomic model in which a credit boom can lead to a financial crisis and examine monetary and macroprudential policy interactions within the model. They find that using countercyclical capital requirements can improve outcomes relative to what obtains when only monetary policy is used.

Another two good examples of research carried out jointly with UK academic researchers are the Staff Working Papers on ‘Macroprudential policy in an agent-based model of the housing market’7by Rafa Baptista, Doyne Farmer and Daniel Tang (Institute for New Economic Thinking, Oxford University) and Marc Hinterschweiger, Katie Low and Arzu Uluc from the Bank and ‘Capital regulation and product market outcomes’8 by Ishta Sen (London Business School) and David Humphry from the Bank, which both fit under the heading of ‘evaluating regulation, resolution and market structures’. In the former paper, the authors developed an agent-based model of the UK housing market and used it to examine how macroprudential policy affects key housing market indicators. They found that an increase in the number of buy-to-let properties could increase the volatility of house prices. Against that they found that a loan-to-income limit could reduce house price volatility. In the latter paper, the authors examined the impact of the introduction of a risk-based capital regulation regime in 2002 on product market outcomes for the insurance industry in the United Kingdom. They found that firms constrained by the new regulations reduced underwriting relative to unconstrained firms, particularly for traditional insurance products which became more capital intensive in the new regulatory regime.

In terms of ‘operationalising central banking’, we have greatly enhanced our use of ‘textual analysis’ to examine how we communicate with the banks and building societies that we regulate and with the general public in, eg, our monetary policy communications. An example of this is the Staff Working Paper on ‘Sending firm messages: Text mining letters from PRA supervisors to banks and building societies’9 by David Bholat, James Brookes, Chris Cai, Katy Grundy and Jakob Lund. In this paper, the authors use textual analysis of the confidential letters sent from the Prudential Regulation Authority (PRA) to banks and building societies it supervises to explore whether the letters vary depending on the riskiness of the firm to whom the PRA is writing. They also compare letters from the PRA with letters written by their predecessor, the Financial Services Authority, finding that PRA letters are more ‘directive’, reflecting the shift in supervisory approach that has occurred in the United Kingdom following the financial crisis of 2007-09.

In terms of ‘understanding household and corporate behaviour, the domestic and international macroeconomy, and risks to the financial system’ we have greatly increased our use of microeconometric data, together with improving our ‘big data’ analytical toolkit. Two recent examples of Staff Working Papers using large microeconometric datasets are ‘Home values and firm behaviour’10 by Saleem Bahaj, Angus Foulis and Gabor Pinter and ‘Gauging market dynamics using trade repository data: the case of the Swiss franc de-pegging’11 by Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios. In the former paper, the authors use firm level accounting data, transaction level house price data and loan level residential mortgage data from the United Kingdom to show that a £1 increase in the value of the residential real estate of a firm’s directors increases the firm’s investment and wage bill by £0.03 each. Given that, in aggregate, the homes of firm directors are worth 80 per cent of GDP, a back of the envelope calculation suggests that a one per cent increase in real estate prices leads, through this channel, to up to a 0.28 per cent rise in business investment and a 0.08 per cent rise in total wages paid. In the latter paper, the authors used trade repository data to examine the effects of the Swiss National Bank’s decision to discontinue the Swiss franc’s floor of 1.20 Swiss francs per euro on the morning of 15 January 2015. They found that this decision led to extreme price moves in the forwards market, similar to those observed in the spot market, while trading in the Swiss franc options market was practically halted. In the following weeks, liquidity was reduced in this market, and this was associated with greater market fragmentation, higher market volatility and an increase in the degree of collateralisation. The authors note that while they analyse the impact of the event on the market and its visibility in the data, they were not making any comment about the Swiss National Bank’s decision itself.

And, finally, in terms of ‘central bank response to fundamental technological, institutional, societal and environmental change’, we have carried out a number of projects on, in particular, climate change12, digital currencies13 and ‘fintech’14. The results of all this work can be found on the Bank’s website.

Current areas of interest
As the economy evolves, so do the Bank’s main areas of research interest. The Bank continues to welcome interest from academics, researchers and experts to discuss and potentially collaborate with us on our research topics. Every six months the Bank reconsiders its list of research priority topics and publishes these on the website.15

The current list of topics is:

• Supervisory tools, communication and behaviour, and their interaction with firms’ culture and behaviour, with particular interest in firm leading indicators or heuristics, and in psychological, sociological, behavioural, survey or experimental methods.

• Macroprudential framework (including stress testing), instruments within and beyond the banking sector and transmission mechanisms, including coordination with monetary policy, microprudential policy and internationally.

• Exploiting big data and experimental methods to understand the economy, the financial system, the impact of central bank policies and their communication, including text-based analysis, household and firm micro data, trade repository data and Solvency II data.

• The effects of post-crisis regulatory reforms (including the new resolution regime) and technological change on the financial system, central bank policies, and the future regulatory landscape.

• Openness and fragmentation of the international economic system, consequences for financing, trade, supply and productivity, and associated distributional effects, including the medium and long term implications of Brexit.

• The interplay between heterogeneity, distributional issues, the economy and central bank policies.

• The future of the monetary policy toolkit, the Bank’s balance sheet and the interplay with prudential policies, including in a low for long environment.

If you are interested in potentially collaborating with researchers at the Bank on any of these topics, you can fill in our contact form16 and we will aim to respond within a few weeks.

Continued academic engagement
In addition to increasing the amount of joint research we are carrying out, we continue to engage more generally with the academic sector, particularly in the United Kingdom. The Bank is a member institution of the Centre for Macroeconomics17 and Ben Broadbent (Deputy Governor for Monetary Policy) chairs its Advisory Board. The Bank has long been a supporter of the Money, Macro and Finance Research Group (MMF).18 In particular, for the past five years we have co-sponsored with the MMF a conference specifically aimed at UK PhD students. The Bank puts together a Special Session at the MMF Conference, at which the Bank also sponsors a Reception. Each year we also put together a Special Session for the Scottish Economic Society Conference and submit Special Sessions to be considered for the Royal Economic Society Annual Conference. Bank researchers continue to give seminars and lectures at universities throughout the United Kingdom and further afield and the Bank also continues to engage directly with UK university departments through its representative on the Conference of Heads of University Departments of Economics (CHUDE).19

Conclusion
Since the launch of the Bank of England’s One Bank Research Agenda in February 2015, Bank researchers – often in conjunction with researchers from outside the Bank – have pushed forward our economic knowledge within the themes laid out in that agenda. But we are not complacent. There is still much to be done to increase our knowledge in those areas that are crucial to the Bank’s mission of ‘Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability’. And the more we can continue to engage and work with the academic sector, the more our knowledge in these areas will grow.

Notes:

1. https://www.bankofengland.co.uk/-/media/boe/files/research/one-bank-research-agenda—summary.pdf?la=en&hash=B2C820FBF6A960C4A625C2DAB5B5B6CE4FEDF120

2. https://www.bankofengland.co.uk/news?NewsTypes=ce90163e489841e0b66d06243d35d5cb&Taxonomies=4509710da7894b9f992d983b8ebdcfbc&Taxonomies=1e6676670f3d4b0d8f981fe03a7b6a53&Direction=Latest

3. https://www.bankofengland.co.uk/research

4. https://bankunderground.co.uk/

5. https://www.bankofengland.co.uk/working-paper/2018/targeting-financial-stability-macroprudential-or-monetary-policy?utm_source=Bank+of+England+updates&utm_campaign=57b70a5e90-EMAIL_CAMPAIGN_2018_06_08_12_40&utm_medium=email&utm_ter

6. https://www.bankofengland.co.uk/working-paper/2018/concerted-efforts-monetary-policy-and-macro-prudential-tools?utm_source=Bank+of+England+updates&utm_campaign=1623c7f4d6-EMAIL_CAMPAIGN_2018_05_25_01_21&utm_medium=email&utm_term=0_556dbefcdc-1623c7f4d6-113374501

7. https://www.bankofengland.co.uk/working-paper/2016/macroprudential-policy-in-an-agent-based-model-of-the-uk-housing-market

8. https://www.bankofengland.co.uk/working-paper/2018/capital-regulation-and-product-market-outcomes?utm_source=Bank+of+England+updates&utm_campaign=81c98cdc26-EMAIL_CAMPAIGN_2018_03_02&utm_medium=email&utm_term=0_556dbefcdc-81c98cdc26-113374501

9. https://www.bankofengland.co.uk/working-paper/2017/
sending-firm-messages-text-mining-letters-from-pra-supervisors-to-banks-building-societies

10. https://www.bankofengland.co.uk/working-paper/2017/home-values-and-firm-behaviour-swp-679

11. https://www.bankofengland.co.uk/financial-stability-paper/2017/gauging-market-dynamics-using-trade-repository-data-the-case-of-the-swiss-franc-de-pegging

12.https://www.bankofengland.co.uk/climate-change

13. https://www.bankofengland.co.uk/research/digital-currencies

14. https://www.bankofengland.co.uk/research/fintech

15. https://www.bankofengland.co.uk/research/research-themes-and-topics

16. http://app.keysurvey.co.uk/f/1022127/f620/ http:/app.keysurvey.co.uk/f/1022127/f620/

17. http://www.centreformacroeconomics.ac.uk/Home.aspx

18. http://www.mmf.ac.uk/