monetary policy in extraordinary times : slides

8/7/2019 Monetary Policy in Extraordinary times : Slides

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Monetary Policy in Extraordinary Times

Prof. David Miles

CEPR Lecture, London Business School

Wednesday 23rd February


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Level of Output Relative to Pre-Crisis Trend DuringPast Recessions (a)

(a)I use GDP and trend growth estimates from Hills, Thomas and Dimsdale ( Bank of England Quarterly Bulletin 2010) tocreate this chart. The authors use a Hodrick-Prescott filter to separate the trend and the cyclical components of real GDPgrowth. I assume that their trend growth estimate at the start of each recession would have prevailed during the followingseven years had the recession not occurred. The chart shows deviations of actual GDP from this projected trend growth.The dotted line for the latest recession uses the MPCs mean projection for output growth over the forecast horizon asreported in the February 2011 Inflation report.

88

90

92

94

96

98

100

1 2 3 4 5 6 7

2008

1990

1979

1929

1973

Years from sta rt of the recessionIndexbasedin

yearofpeaklevelofoutput


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Commodity Prices (in , Jan 2007 = 100)

Note: The total commodities series uses the GSCI index.

0

50

100

150

200

250

300

Jan/07 Jan/08 Jan/09 Jan/10 Jan/11

Agriculture and livestock

Industrial Meta ls

Oil

Total Commodities


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Public Sector Stock of Net Debt (% of GDP)

0

50

100

150

200

250

300

1855 1875 1895 1915 1935 1955 1975 1995

Source: 1855-2007 Hills, Thomas and Dimsdale (Bank of England Quarterly Bulletin 2010), 2007-2009 ONS series code RUTO.

Note: The ONS calculate public sector net debt as financial liabilities less liquid assets and does not include all assets andliabilities of the public sector. The public sector, including the banks classified to the public sector, owns considerable amountsof illiquid assets, but these are not taken into account in the calculation of net debt.


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Annual Inflation

Source: ONS

-5

0

5

10

15

20

25

30

963 1973 1983 1993 2003

CPI RPI %


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Projected Level of GDP

Source: Bank of England Inflation Report, February 2011

Note: The width of this fan chart over the past is to take account of likely revisions of the data.


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Bank Rate Since 1964

Source: Bank of England

0

2

4

6

8

10

12

14

16

18

%

1700 1800 20001900


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CPI Inflation and the Contribution of VAT, EnergyPrices and Import Prices

Source: Bank of England Inflation Report, February 2011

Note: The blue swathe sums the minimum and maximum of the individual estimated impacts of VAT, energy prices and import prices on CPI inflation.


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Interest Rates Faced by Households and Firms

Source: Bank of England and Bank of America Merrill Lynch

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09 10 11

Bank RateHousehold unsecured borrowing rateHousehold deposit rateHousehold secured borrowing rateCorporate borrowing rate (bond yields)

Per cent

Note:-the corporate borrowing rate series uses an index of BBB-rated sterling corporate bonds issued by non-financial companies with acurrent average maturity of 8.5 years.- the household lending and deposit rate series show data on quoted rates by UK Monetary and Financial Institutions.


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Quarter-on-quarter Inflation Rates

Note: Seasonally adjusted. Projections from 2011 onwards are for the mode.

0

1

2

3

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Percentage change on a quarter earlier


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UK Debt by Sector as % of GDP

0

50

100

150

200

250

300

350

400

450

500

1987 1990 1993 1996 1999 2002 2005

Corporate

Household

Financial

%


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Monetary and Financial Institutions Assets

0

200

400

600

800

1000

1200

1987 1990 1993 1996 1999 2002 2005 2008

% of nominal GDP


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Leverage of UK Major Banks

0

10

20

30

40

5060

70

80

90

2005 2006 2007 2008 H12009

2009 H12010

Max -min range Median Ratio

Source: Banks published financial accounts.


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UK Banks Leverage Ratio (a)

(a) UK data on leverage use total assets over equity and reserves on a time-varying sample of banks, representing the majority of the UK banking system, in terms ofassets. Prior to 1970 published accounts understated the true level of banks' capital because they did not include hidden reserves. The solid line adjusts for this. 2009observation is from H1.(b) Change in UK accounting standards.(c) International Financial Reporting Standards (IFRS) were adopted for the end-2005 accounts. The end-2004 accounts were also restated on an IFRS basis. Theswitch from UK GAAP to IFRS reduced the capital ratio of the UK banks in the sample by approximately 1 percentage point in 2004.

0

5

10

15

20

25

30

35

40

1880 1900 1920 1940 1960 1980 2000

(c)(b )


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UK Banks Liquidity Ratio (a)

(a)From 1968 the liquidity ratio is: Cash + Bank of England balances + money at call + eligible bills + UK gilts as a percentage ofbanks' total asset holdings. Pre-1968 the ratio is calculated as the liquid assets of the London Clearing Banks as a percentage ofgross deposits.


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Economic Impact of Reducing Leverage from 30 to 15 (Doubling Tier1 Capital from 8.4% to 16.8% of risk-weighted assets) Basis Points

Source: Miles, Yang, Marcheggiano (2011)

Tax effect, Tax effect, Base case: no taxNo tax effect

no M -M 45% M -M effect, 45% M-Mand 75% M -M

Change in banks WACC 38.0 22.5 17.9 7.7

Change in PNFC WACC 12.7 7.5 6.0 2.6

Fall in long run GDP 31.7 18.8 14.9 6.4

Present value of GDP lost1268 751 596 256

monetary policy in extraordinary times : slides

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