Transcript Accompanying slides

Monetary Policy in Extraordinary Times
Prof. David Miles
CEPR Lecture, London Business School
Wednesday 23rd February
Level of Output Relative to Pre-Crisis Trend During
Past Recessions (a)
Years from start of the recession
2
3
4
5
6
7
98
96
2008
94
1990
1979
1929
92
90
1973
Index based in year of peak level of output
1
100
88
(a) I use GDP and trend growth estimates from Hills, Thomas and Dimsdale ( Bank of England Quarterly Bulletin 2010) to
create this chart. The authors use a Hodrick-Prescott filter to separate the trend and the cyclical components of real GDP
growth. I assume that their trend growth estimate at the start of each recession would have prevailed during the following
seven 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 MPC’s mean projection for output growth over the forecast horizon as
reported in the February 2011 Inflation report.
2
Commodity Prices (in £, Jan 2007 = 100)
300
Agriculture and livestock
250
Industrial Metals
200
150
Oil
100
Total Commodities
50
0
Jan/07
Jan/08
Jan/09
Note: The total commodities series uses the GSCI index.
Jan/10
Jan/11
3
Public Sector Stock of Net Debt (% of GDP)
300
250
200
150
100
50
0
1855
1875
1895
1915
1935
1955
1975
1995
Note: The ONS calculate public sector net debt as financial liabilities less liquid assets and does not include all assets and
liabilities of the public sector. The public sector, including the banks classified to the public sector, owns considerable amounts of
illiquid assets, but these are not taken into account in the calculation of net debt.
Source: 1855-2007 Hills, Thomas and Dimsdale (Bank of England Quarterly Bulletin 2010), 2007-2009 ONS series code ‘RUTO’.
4
Annual Inflation
CPI
%
RPI
30
25
20
15
10
5
0
-5
1963
1973
1983
1993
2003
Source: ONS
5
Projected Level of GDP
Note: The width of this fan chart over the past is to take account of likely revisions of the data.
Source: Bank of England Inflation Report, February 2011
6
Bank Rate Since 1964
%
18
16
14
12
10
8
6
4
2
0
1700
1800
1900
2000
Source: Bank of England
7
CPI Inflation and the Contribution of VAT, Energy
Prices and Import Prices
Note: The blue swathe sums the minimum and maximum of the individual estimated impacts of VAT, energy prices and import prices on CPI inflation.
Source: Bank of England Inflation Report, February 2011
8
Interest Rates Faced by Households and Firms
Bank Rate
Household unsecured borrowing rate
Household deposit rate
Household secured borrowing rate
Corporate borrowing rate (bond yields)
Per cent
20
15
10
5
0
00
01
02
03
04
05
06
07
08
09
10
11
Note:
-the corporate borrowing rate series uses an index of BBB-rated sterling corporate bonds issued by non-financial companies with a
current average maturity of 8.5 years.
- the household lending and deposit rate series show data on quoted rates by UK Monetary and Financial Institutions.
Source: Bank of England and Bank of America Merrill Lynch
9
Quarter-on-quarter Inflation Rates
Percentage change on a quarterearlier
3
2
1
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Note: Seasonally adjusted. Projections from 2011 onwards are for the mode.
10
UK Debt by Sector as % of GDP
%
Corporate
500
450
Household
400
Financial
350
300
250
200
150
100
50
0
1987
1990
1993
1996
1999
2002
2005
11
Monetary and Financial Institutions Assets
% of nomina l GDP
1200
1000
800
600
400
200
0
1987
1990
1993
1996
1999
2002
2005
2008
12
Leverage of UK Major Banks
Max-min range
Ratio
90
Median
80
70
60
50
40
30
20
10
0
2005
2006
2007
2008
H1
2009
2009
H1
2010
Source: Banks’ published financial accounts.
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UK Banks Leverage Ratio (a)
(b)
(c)
40
35
30
25
20
15
10
5
0
1880
1900
1920
1940
1960
1980
2000
(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 of
assets. 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. 2009
observation 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. The switch
from UK GAAP to IFRS reduced the capital ratio of the UK banks in the sample by approximately 1 percentage point in 2004.
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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 of
banks' total asset holdings. Pre-1968 the ratio is calculated as the liquid assets of the London Clearing Banks as a percentage of
gross deposits.
15
Economic Impact of Reducing Leverage from 30 to 15 (Doubling Tier
1 Capital from 8.4% to 16.8% of risk-weighted assets) – Basis Points
Tax effect,
no M-M
Tax effect,
45% M-M
Base case: no tax No tax effect
effect, 45% M-M and 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 lost
1268
751
596
256
Source: Miles, Yang, Marcheggiano (2011)
16