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Home > News and Publications > Quarterly Bulletin 2014 Q1

Quarterly Bulletin 2014 Q1

Each article is available as a separate pdf file; click on the appropriate title to access the relevant file. Alternatively you may download the complete issue.

Topical articles
Money in the modern economy: an introduction (538KB)
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This article provides an introduction to what money is today. Money today is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services. There are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.

A short video, filmed in the Bank of England’s gold vaults, explains what money is in the modern economy:

Money creation in the modern economy (112KB)
By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

Money creation in the modern economy: Long-run data annex (736KB)

A short video, filmed in the Bank of England’s gold vaults, explains how money is created in the modern economy:

The Court of the Bank of England (67KB)
By Sir David Lees and John Footman.
The Court is the Bank’s Board of Directors. Its role has changed over the years as the Bank has evolved from a privately owned bank into a public institution, and especially over the past 20 years. In statute, Court’s task is to ‘manage the affairs of the Bank’. It sets the Bank’s strategy and budget and risk standards, and oversees internal controls through its Audit and Risk Committee. Court also monitors the processes and performance of the Bank’s key policy Committees — the Monetary Policy Committee, the Financial Policy Committee and the Board of the Prudential Regulation Authority. This role is performed by the nine non-executives, who sit on an Oversight Committee created by the 2012 Financial Services Act.

Dealing with a banking crisis: what lessons can be learned from Japan’s experience?
By Benjamin Nelson of the Bank’s Monetary Assessment and Strategy Division and Misa Tanaka of the Bank’s Prudential Policy Division.
This article examines Japan’s policies in dealing with its banking crisis during the 1991–2004 period, in order to draw lessons for policymakers today. Japan’s policy choices reflected a difficult trade-off between the need to contain moral hazard on the one hand, and the need to limit systemic risk on the other. The resolution of the crisis ultimately required recapitalising banks and resolving uncertainty over banks’ asset valuations.

A short video explains some of the key topics covered in this article:

The role of business model analysis in the supervision of insurers (74KB)
By John Breckenridge of the Prudential Regulation Authority’s Insurance Directorate and James Farquharson and Ruth Hendon of the Prudential Regulation Authority’s Policy Division.
The Prudential Regulation Authority (PRA) supervises insurance companies since, in the absence of regulation, there could be adverse effects for policyholders and financial stability. Like all firms, insurers’ business models — the ways they make profit — and the risks they face evolve over time. The PRA uses business model analysis (BMA) as part of its forward-looking supervisory approach, to help to ensure that these evolving risks are recognised. This article explains the use of BMA, using as case studies the rise of price comparison websites in the motor insurance market, and the growth of non-standard annuity products for life insurers.

Nowcasting UK GDP growth (102KB)
By Venetia Bell, Lai Wah Co, Sophie Stone and Gavin Wallis of the Bank’s Conjunctural Assessment and Projections Division.
Official estimates of UK GDP growth are published with a lag, but other data and statistical models provide an early indication of GDP growth. This article describes the approaches taken by Bank staff to produce early estimates (‘nowcasts’) of GDP growth, ahead of the publication of official estimates. Although the confidence bands around the Bank staff’s nowcasts can be large, these estimates have tended to be more accurate than those from a simple statistical model.

Curiosities from the vaults: a Bank miscellany (225KB)
By Jennifer Adam and Chris Shadforth of the Bank’s Communications Directorate.
Over the period since its foundation in 1694, the Bank has amassed an extensive collection of artworks, coins, medals, banknotes and myriad other objects, mainly acquired in the course of its business. This article presents a few items of intrigue from a new exhibition that will run in the Bank’s museum from 31 March to 12 July 2014. These include a secret ballot box designed by the Bank’s architect, Sir John Soane; a saddle bag that may have belonged to Lawrence of Arabia; and signed high value banknotes from distinguished visitors to the Bank — from Prince Frederick of Prussia in 1842 through to George Eliot, President Nelson Mandela and, in December 2012, Her Majesty the Queen. Taken together, it is hoped that this collection of curiosities provides an interesting snapshot of a unique public collection.

Recent economic and financial developments
Markets and operations (218KB)
The review period saw an improvement in the growth prospects of some developed economies with an associated rise in financial market prices. The relatively strong outlook for the United Kingdom also led to an increase in sterling short-term interest rates. Idiosyncratic risks in emerging market economies resulted in a bout of turbulence during the review period. In the February Inflation Report the Bank’s Monetary Policy Committee (MPC) provided further guidance on the likely path of its policy once the unemployment threshold of 7% was reached. The MPC judged that there was scope for the UK economy to recover further before Bank Rate was raised and, even when Bank Rate did rise, it was expected to do so only gradually and to a level materially below its pre-crisis average of 5%. The year end saw some volatility in money markets internationally. This included sharp falls in UK overnight interest rates.

Monetary Policy Roundtable (36KB)
Summary of the eleventh Monetary Policy Roundtable hosted by the Bank of England and the Centre for Economic Policy Research (CEPR) on 17 December. There were two topics of discussion: rationale and reactions to state-contingent forward guidance; and how quickly can the UK economy grow following the Great Recession?
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