Suchergebnisse

The financial crisis that started in the summer of 2007 and worsened in the autumn of 2008 has involved a repricing of risk and a reduction in the level of potential output in the OECD of between 3 and 5 per cent. In addition it has caused a major recession, leaving output gaps in the UK, the US and the Euro Area currently standing at 3 to 5 per cent of potential GDP despite active policy responses. We show that monetary policy (and especially quantitative easing) has increased output growth in the US and the UK by half a per cent in 2009, and will do the same in 2010Q1. Fiscal policy is also shown to have been effective, but we argue that more could have been done if unfounded worries about excess borrowing had not arisen.

Sterling has fallen markedly against other currencies in the past few months, and in January reached its lowest point against the euro (or its equivalent) since the last quarter of 1996, as we can see from figure 1, which uses the first three weeks of January 2008 as an indicator of the value that will be achieved in the whole first quarter. Sterling has also weakened against the dollar in the past few months, although it remains at a high level. In effective terms, sterling fell on average by 2.5 per cent in the fourth quarter, and in early January it was more than 6 per cent lower than the average for the previous quarter. The fall was largely unanticipated, and the effective exchange rate for the first quarter of 2008 is more than 7 per cent below where we assumed it would be in October 2007.

Over the summer of 2007 problems began to emerge in financial markets as a result of debt defaults, particularly on US housing lending to individuals with low credit ratings. The globalisation of financial markets has meant that such risks are shared across banks throughout the world and a number of European banks suffered major losses as a result of purchasing high yield high risk bundles of these assets. In this note we discuss the possibility of a systemic banking crisis as a result of debt defaults, putting this risk and its impact on the economy into recent historical context. We also look at the vulnerability of the personal and business sectors to increases in borrowing rates, and at the evidence for a risk related rise in borrowing rates. We then use our model, NiGEM, to investigate the impacts of a significant rise in the spread between lending and borrowing rates for both producers and consumers. Such an increase in spreads might arise when banks wish to rebuild their capital after a crisis or reflect significant capital rationing. In either case they represent the immediate impacts of a crisis in the banking sector. The spread between borrowing and lending rates for producers reflects a risk premium in the business sector, and was used in the September EFN report to the European Commission, whilst the spread between consumer lending and borrowing rates is in use for the first time on the model. The debt-to-income ratio has been rising in the personal sector in a number of countries, and especially in the UK, Ireland and Spain, as we can see from figure 1, and this might indicate where problems could arise.