Impact
My research has had significant impact on policymakers in government and in central banks around the world. The REF2021 panel classified my impact as 'world leading'.
Impact on National Policymaking.
The Decision Maker Panel (DMP) and Working From Home(WFH) surveys are fully embedded in policy making at the Bank of England and the highest levels of government up to and including the Prime Minister.
The Bank of England’s Monetary and Financial Policy Committees referenced DMP data to support interest rate setting decisions in every meeting since 2017. Bank has cited DMP in over 25 speeches, 39 official publications and submissions to Parliament.
Expertise provided from DMP to 10 Downing St, Cabinet Office, BEIS, HM Treasury, Treasury Committee and Parliament provided policy-relevant research on Brexit uncertainty. Exchanges with private office of Chancellor and Prime Minister helped support Brexit and Covid-19 responses such as tax relief packages in Budget 2018, the design of business grant and loans, and the ‘furlough’ scheme. The Chief Economic Advisor to the Prime Minister and the Chancellor wrote ‘The survey data has provided extremely useful data for the government’s policy response to Covid-19.’
Insights shared with Cabinet Office and DLUCH from the WFH survey have informed the levelling up agenda, government advice over Plan B Covid-19 restrictions 2021 and effects of sustained working from home on commuting and spending patterns.
Support for Business.
DMP and WFH expertise has been shared with UKRI Innovate UK Chief Economist and Board, to drive their use of £1bn core funding for R&D. My input enhanced opportunities for the CBI, KPMG and Experian to develop integrated data analysis for business and the public good.in collaboration with senior officials at Bank, HM Treasury, Cabinet Office, DLUCH and ONS.
Support for Local Government.
Through the D2N2 Local Enterprise Partnership DMP informed the Nottingham City Council local plan in response to Covid. At the Midlands Engine Partnership Board DMP made the case for Levelling Up Funds and Community Renewal Funds for the midlands.
Business Uncertainty and Covid-19
UK Government and policy committees at the Bank of England are in urgent need of information on the real-time state of UK businesses. The more granularity that is provided in terms of the relative performance of different firms by size, sector and region the more useful it is likely to be. To meet this first and most pressing need, we propose to take three existing surveys updated to test and implement new Covid-19 questions that will provide data in real time to supply this information – some of this is already underway but it will need further refinement.
We aim to deliver three key insights:
1) immediate and lasting changes to business conditions;
2) the response of firms to those conditions in terms of employment, investment, logistics etc;
3) lessons about the responses that will reveal which firms were most resilient and prepared for future shocks.
These will provide the basis for policy interventions by HM Treasury and Bank of England to support businesses through the Covid-19 shock and give insights that will enhance longer-term business planning by BEIS and Local Enterprise Partnerships (LEPs).
Decision Maker Panel, Management and Expectations Survey and Business Impact of Covid Survey
Covid-19 is expected to create the largest contraction in economic activity in 300 years (a fall in real GDP of 35% and increase in unemployment by 2,000,000 in 2020Q2, are predicted by the Office for Budget Responsibility). In just four months, Covid-19 has had a global impact, first through the supply chain for goods and services then through reductions in demand as restrictions on movements of people, goods and services limit sales. Both the UK Treasury and the Bank of England have launched large-scale programmes to reduce unemployment and prevent businesses from going bankrupt.
There is a recognition at the highest level of government that a balance will need to be struck between dealing with the medical and the economic effects of Covid-19. Continuing a lockdown will tackle the medical emergency, saving lives and preventing overload of the NHS, but a lockdown will reduce output that could have lasting implications for the UK economy, not least a ballooning public sector net debt greater than 100% of GDP.
Without immediate data collection and analysis over the next 18 months we will miss vital information about the impact of Covid-19 on businesses of different sizes, operating in different sectors and regions. The real-time importance of this information is critical to decision making about the duration and management of the lockdown arrangements in the UK. It is also critical for an understanding of the impact of Covid-19 on UK businesses and the performance of the UK economy.
We are working with the Bank of England and Office for National Statistics under the umbrella of ESCoE to co-ordinate the insights from three different surveys on the economic impact of Covid-19.
Uncertainty and Brexit
Decision Maker Panel
The Decision Maker Panel (DMP) – a collaboration between the University of Nottingham, Stanford University and the Bank of England (Bank) – is a unique example of knowledge exchange involving academics and policymakers during a critical period of Brexit uncertainty.
In partnership with Professor Nicholas Bloom of Stanford University, the Bank of England and HM Treasury we have set up a Decision Maker Panel of senior executives from across industries and from around the country to assess the impact of substantial UK and international economic uncertainty. Since August 2016 this panel has collected information on how business conditions are changing. The Decision Maker Panel covers firms' year-ahead expectations and associated uncertainties regarding changes in their prices, level of employment, capital investment, and sales revenue with each of the monthly surveys focusing on one of these four topics on a rotating basis.
DMP, a monthly online survey of 9,400 UK companies, was established to measure UK investment, productivity, sales, employment and uncertainty following the EU referendum and to inform policy responses by the Bank and the UK government (HM Treasury and BEIS). The information provided in responses to this survey is provided regularly to brief the Monetary Policy Committee on the prospects for the UK economy in response to economic uncertainty. It helps the MPC to build up a picture of the outlook facing UK businesses which in turn helps to inform interest rate decisions.
The approach to gathering data through our recruitment team and online survey has been used to inform BEIS business Stakeholder Engagement team and Central Analysis team in constructing their own Business Survey and our findings have been used by BEIS and HM Treasury to assess the response of different business sectors, regions and firm types (e.g. small, young) most affected by uncertainty.
We instigated the project because the Bank lacked comprehensive business data to help it make monetary policy decisions under uncertainty. Business insight was too often based on small, unrepresentative samples of data, while official statistics were only available with a significant lag. DMP innovated by providing detailed surveys – original to the UK – that capture business executives’ expectations and uncertainty by region, industry and business size. These surveys became critical to policymaking as:
They significantly transformed how the Bank conceptualises the type of uncertainty that the UK is experiencing due to Brexit;
They identified Brexit as a major source of uncertainty for firms, with most firms expecting a negative impact of Brexit on sales, investment and higher costs;
They revealed that Brexit uncertainty lowers growth in Britain’s most productive firms.
In late 2016 the Bank could only draw on limited data (see Testimonies and Broadbent 2016), but during 2017 DMP conceptualised and quantified uncertainty and established a reputation for reliability. Throughout 2017-18 the economic research insights gathered through DMP were embedded at the highest levels of UK policymaking; these far exceeding the partners’ objectives as:
The project grew in scale and scope (designed to survey 2,500 businesses, DMP had recruited 8,000 firms); The intelligence established reliability versus official data and was more timely;
It transformed insight for the Bank’s Monetary Policy Committee, who requested vital information from DMP on uncertainty, employment, investment and productivity for policy meetings and evidence to Parliament;
It facilitated communication of emerging policy challenges (Brexit) through speeches by Governor Mark Carney (July 2017), Deputy Governor Dave Ramsden (November 2017, June 2018) and Chief Economist Andy Haldane (November 2017), MPC Member Jan Vlieghe (2019), Deputy Governor Ben Broadbent (2019);
It explained policy decisions in press conferences and official publications e.g. Inflation Reports, Agents’ Briefings etc.
DMP’s insights have enabled policymakers to determine appropriate interest rates during 2017-18 when lower business investment was holding back economic growth. This knowledge was widely shared in the media to justify policy decisions. In June 2018 DMP research contributed to an HM Treasury-BEIS British Productivity Review seeking evidence on drivers of UK productivity to better understand policy interventions to improve UK output per head.
By 2018-19 the Bank felt able to extensively reference DMP in verbal and written evidence to the Parliamentary Inquiry into the Brexit Withdrawal Agreement (December 2018), quantifying the likely effects of Brexit uncertainty using DMP data, as did Deputy Governor Ben Broadbent (2019). Significantly, DMP evidence also persuaded the Chancellor to raise the Annual Investment Allowance fivefold to £1 million (Budget 2018) to offset Brexit uncertainty.
See more Testimonies from Policymakers.
In 2021, the Decision Maker Panel was a Prize Finalist in the ESRC Celebrating Impact Awards, for which ESRC sponsored the production of a short introductory film.
The Bank of England produces a quarterly Decision Maker Panel Briefing document available here.
Management and Expectations Survey
Productivity and Management Practices
In partnership with Professor Nicholas Bloom (Stanford), John van Reenen (MIT) and Phil Wales (ONS), Rebecca Riley (ESCoE) and Tatsuro Senga (QMUL) we have developed a new dataset of firm-level management and expectations data (the Management and Expectations Survey) to assess the implications for aggregate productivity slowdown in UK business.This has taken on greater significance following the UK’s ‘Brexit’ referendum and ahead of the coming periods of uncertainty in the UK’s economy, it is difficult to over-emphasise the importance of our better understanding the impact of uncertainty on firm activities. It is well known that uncertainty can delay investment decisions at the firm level, which in turn may result in mis-allocation of resources such as capital and labour, reducing aggregate productivity. While the UK’s slowing productivity is an aggregate outcome, productivity varies substantially across individual firms; thus, a closer look at firm-level micro data is needed to better understand the causes of productivity variations and effectively address the productivity puzzle.We have been cited by and given evidence to the BEIS Business Productivity Review.
In 2017, the Office for National Statistics (ONS), in partnership with the Economic Statistics Centre of Excellence (ESCoE), developed and conducted the Management and Expectations Survey (MES), the largest ever survey of UK management capabilities executed on a population of 25,000 firms across industries, regions, firm sizes and ages. The MES was a voluntary survey of businesses with ten or more employees, drawn from the 2016 Annual Business Survey sample, covering both the production and services industries. The sample was stratified by employment size groups, industries and regions. The survey covered the same sample frame as the Annual Business Survey for 2016 conducted by the ONS and could be matched to that data on productivity and economic performance that could be linked to management practices and expectations,
The MES questionnaire built on the experience of the US Management and Organizational Practices (MOPS) surveys run by the US Census in 2010 and 2015 on around 40,000 firms, and overseen by a team including Nicholas Bloom. The MES closely followed and used a selection of questions drawn from the US MOPS - the original survey questionnaire design was based on international experience including a survey tool used by the World Bank and further used by the ONS as the Management Practices Survey (MPS) pilot successfully executed in 2016. Based on the response to each question, we retrieve the management score for each firm using an identical methodology to the US MOPS, which will later facilitate comparisons internationally. Deriving the standardized management scores at the firm level, we examined cross-sectional features of structured management practices by sectors, regions and other firm characteristics such as firm size and age. The MES also collected information on 5-bin subjective expectations on turnover, expenditure, capital investment and employment, using a “five-bin” scale. It also includes a question on expectations of future growth of UK real gross domestic product (GDP).
Key findings include:
Firm size was found to be significant in explaining variations in management scores, with larger firms more likely to have a higher prevalence of structured management practices than smaller firms. Compared with medium-sized and large firms, we found a higher concentration of small firms in the left-hand tail of the management score distribution, where management scores were lower.
The dispersion of management scores for foreign-owned firms was notably different from that of domestically-owned firms. Compared with domestic firms, foreign-owned firms had higher management scores across all percentiles and a narrower range of scores between the 10th and 90th percentiles and inter-quartile range, indicating relatively similar scores among firms in this category. Foreign firms implement a larger number of management practices and do so more intensively than UK owned firms.
Considering expectations, younger businesses and those with more structured management practices were more optimistic of their future turnover growth, while foreign-owned firms were more pessimistic than domestically-owned firms. Firms that were smaller, younger, domestically-owned, family- owned-and-family-managed and less productive display higher levels of uncertainty.
Lower productivity firms were more uncertain about their future turnover, investment and employment growth than higher productivity firms, even after controlling for a number of other firm-level characteristics. In contrast, lower productivity firms were no more uncertain about their intermediate costs than higher productivity firms.
o Impact on Policymakers and Businesses
Raising productivity is one of the government’s key priorities and core to the UK’s Industrial Strategy. The Industrial Strategy White Paper (November 2017) asked a review of the actions for improving the productivity and growth of small and medium-sized businesses effectively. On 23 May 2018, Business Productivity Review: Call for Evidence (May 2018) extensively referred to our analysis of the MES on management practices and productivity. Subsequently, our team had a consulting meeting at BEIS will officials and submitted our report to the Government call for evidence in July 2018. The Review has not yet reported.
On 1 October 2018, Chancellor Phillip Hammond announced £31m for a business-led package of initiatives aimed at driving up firm-level productivity, drawn from the Business Productivity Review’s call for evidence. Our main findings above are well taken in that the package announced by the Chancellor consists of (1) providing management training to 2,000 SMEs business leaders, (2) strengthening local networks so that the UK’s hundreds of thousands of business leaders can learn from each other about management excellence, (3) getting the UK’s leading businesses signed up to a new mentoring programme for SMEs to support them to adopt new management practices. This is currently being implemented using funding from the ESRC.
Impact on monetary statistics and monetary policy
Understanding monetary transmission
My studies on money and credit with Andrew Brigden and Alec Chrystal proved highly significant in explaining key interactions within the monetary transmission mechanism (MTM). For the first time the Bank of England could be confident that excess money and credit balances held by some non-bank financial institutions should be excluded from the analysis of spending and inflation, like the assets and liabilities held by banks, while others should not be excluded.The Monetary Policy Committee (MPC) had previously placed equal weight on money and credit balances held by all types of non-bank financial institutions, which could have led to mis-measurement of growth in money and credit aggregates in their assessment of inflationary pressures. The Bank of England has since cited the research as a major contribution to understanding the MTM.
Changes to monetary statistics
The research had an impact on official monetary aggregates published by the Bank of England. The research provided the starting point for a review of other financial institutions in the monetary statistics taken up by Spencer Dale when he was Head of Division in Monetary Assessment and Strategy. The Bank undertook to review its monetary statistics and after public consultation adjusted its measure of broad money from M4 (deposits held by banks and building societies) to M4X (M4 minus holdings of money by certain bank-like entities known as intermediate other financial institutions). Since June 2009, the M4X statistics have been produced monthly by the Bank. The decision to exclude non-bank financial institutions that undertake similar activities to banks such as bank holding companies, but to include financial institutions that serve firms and households (e.g. leasing companies) recognizes that some financial institutions have an impact on output and inflation and others do not.
This work began when I was approached to join the Monetary Assessment and Strategy Division of the Bank of England headed by Sir Paul Tucker (subsequently a Deputy Governor of the Bank) after having published the book Buffer Stock Models and the Demand for Money in 1994 and a number of refereed papers on demand for money by UK households and firms. The research undertaken subsequently was published in the Bank of England working papers numbers 100, 134, 151 and 170.
See full Impact Case Study here.
Impact on understanding interest rate setting by banks
Traction of monetary policy in the UK
The Bank of England was concerned in 1999 about comments in the press that its policy decisions did not seem to be passed on to mortgage rates offered by banks. My research with Boris Hofmann showed that banks only actively change loan or deposit rates for their products when they observe a gap emerging between the actual and desired level of those rates. This is because adjustment of loan and deposit rates is costly. This research helped to explain why interest rates set by banks do not follow official rates set by central banks at turning points but smooth out peaks and troughs. It also explained why banks sometimes appear not to respond to changes in policy rates. The study of how retail interest rates set by banks (such as deposit, loan and mortgage rates) adjust as central banks adjust policy rates is crucial to the understanding of monetary transmission. The research was published as Bank of England working paper 254 and in Economica.
Anticipation of monetary policy in the euro area
How much do banks anticipate future changes in policy affecting short-term money market rates when setting interest rates for households and firms? The Banque de France invited work with Anindya Banerjee and Victor Bystrov to explore whether future as well as current money market rates such as EURIBOR affect the costs of funds for banks. Our research explored this issue for the major European economies and individual French banks using forecasts of EURIBOR rates and forward rates. We found that banks do anticipate future changes in policy when setting loan rates for households and firms. The findings were used by the Banque de France to establish data and modelling protocols, forecasting assessment criteria, and informed the European Central Bank through the Expert Group on Financial Assumptions (EGFA) from April 2011-June 2013. This work was published as Banque de France Working Paper N 361, and in the Journal of Money, Credit and Banking Paper.
Explaining high lending rates in Europe since the crisis
Lending rates in European economies have not fallen as much as policy rates since the financial crisis in 2008. Inevitably this has raised the question of whether banks have been taking advantage of the low interest rate environment by failing to pass on lower rates to loans. In Ireland the Finance Minister, Michael Noonan, scheduled meetings with the heads of banks over this very issue. The Irish Times noted ahead of the meetings that "Mr Noonan is likely to ask why there has been no significant movement on lowering SVR mortgages, despite a significantly lower cost of wholesale funding." [see full article].
The Bank for International Settlements invited me to explore the divergence between lending and policy rates in research work with Anamaria Illes, Marco Lombardi and Boris Hofmann. By exploring the full range of liabilities banks use to fund their lending we show that the actual funding costs of banks did not fall as much as policy rates, due to higher perceived risks associated with banks. This explains why lending rates diverged from policy rates. It also shows mortgage and deposit rates have a remarkably stable relationship with bank funding costs (WACL). The stability of this relationship means that funding costs explain how banks set lending rates before as well as after the crisis, and it is robust to the sovereign debt crisis of 2010-2012. The full story is in BIS working paper 486 and updated in CFCM working paper 15/05.
The European Commission has used this analysis to explain how real rate differentials have been magnified by a rise in nominal interest rate dispersion, which is mainly due to bank interest rate setting. Using the WACL they show that nominal rate dispersion is not a temporary factor but a persistent and integral part of adjustment of real rates and hence real activity in the EMU. European Commission Quarterly Report on the Euro Area Volume 14, No 4 (2015) p 35-48..
The European Central Bank has cited the paper when discussing the recent developments in the composition and funding of banks In their Economic Bulletin February 2016.
The effect of unconventional monetary policy on bank funding costs
The Bank for International Settlements invited me to explore whether the new tools used by the European Central Bank (ECB) had any influence on bank funding costs. Funding costs drive bank lending rates, and firms in European economies depend to a greater extent on bank credit than their competitors in the UK and the US. We found that liquidity operations conducted from 2008-2011 lowered short term funding costs, while longer term funding costs were influenced to a greater degree by credit easing, asset purchases and announcements of intentions. Comparing conditional forecasts of the effects of conventional monetary policy against actual data that was also influenced by unconventional policy, we were able to establish that there was an impact from ECB liquidity operations, credit easing and asset purchases that lowered bank funding costs. These results were supplemented by event studies that confirmed the immediate effects of policies on funding costs. The results will appear in a BIS working paper shortly.
The end of the age of innocence
In this work with research staff at the Bank of England we assess the end of "the age of innocence" – when banks lent to each other unsecured at a small premium to expected policy rates – a period that effectively ended with the financial crisis. We explore the implications for lending and deposit rates set by the six largest UK banks and the efficiency of monetary policy transmission. We investigate the role of internal transfer pricing and how changes in idiosyncratic funding costs affected retail rates in the aftermath of the crisis. We confirm its importance, but find competition limits banks’ ability to drive retail rates away from market median levels, themselves influenced by monetary policy and average funding spreads. This paper was presented at the Money Macro and Finance Research Group Annual Policy Conference 7 October 2016 at Bloomberg HQ, London.