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

100

Indexbasi
1 2 3 4 5 6 7
98

96

yearofpklvut
2008 94

1990
92
1979
1929
90
1973

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 Jan/10 Jan/11
Note: The total commodities series uses the GSCI index. 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
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

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 Per cent

Householdunsecuredborrowingrate
Householddeposit rate
20
Householdsecuredborrowingrate
Corporateborrowingrate (bond yields)
15

10

0
00
Note:
01 02 03 04 05 06 07 08 09 10 11
-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 quarter earlier

3

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

% 500
Corporate
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 nominalGDP
1200

1000

800

600

400

200

0
1987 1990 1993 1996 1999 2002 2005 2008

12
Leverage of UK Major Banks

Max -minrange Median Ratio

90
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 H1 2009 H1
2009 2010
Source: Banks’ published financial accounts.

13
 UK Banks Leverage Ratio (a)

(b) (c) 40

35

30

25

20

15

10

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, Tax effect, Base case: no tax

No 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 lost
1268 751 596 256

Source: Miles, Yang, Marcheggiano (2011)

16