Convexity and Lowflation: Difference between pages

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(Add quote. Source: Bank of England https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/covid-19-and-monetary-policy-speech-by-michael-saunders.pdf?la=en&hash=02111FB09D7C30180137C228BB61E8C5447A84F9)
 
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#Broadly, convexity measures the curvature of the line representing the relationship between an instrument’s yield and its value.  Duration and Modified duration can be used as the basis for straight line estimates of the rate of change of price/present value.  Convexity is an estimate of the rate of change of durationThis is often visualised as the degree of 'curviness' of the line representing value versus yield.  Convexity is calculated as: '''Sum [PV x t x (t+1)]/Sum(PV)'''.
''Economics.''
#More strictly defined, convexity is the rate of change of duration, and modified convexity is the rate of change of modified duration, for small changes in yield from the given starting yield.
 
#More loosely, the terms ''Convexity'' and ''Modified convexity'' are often used interchangeably.  Obviously this can lead to potential confusion, so it is important to clarify whether convexity or modified convexity is intended in any particular context.
A situation in which inflation is positive, but very low, for example below the (positive) inflation target of the central bank.   
 
 
:<span style="color:#4B0082">'''''The economic impacts of Covid-19 to date'''''</span>
 
:"At present, if we overdo the stimulus somewhat and then find the economy recovers strongly, we have ample tools and time to tighten policy again before persistent excess demand and inflation become a problem ...  
 
:Conversely, if we provide too little stimulus, the economy could slip into a lowflation trap that is much harder to escape, with greater long-term costs from business failures and high unemployment."
 
:''Michael Saunders, External Member of the Bank of England's Monetary Policy Committee (MPC), May 2020.''
 
 
== See also ==
== See also ==
* [[Duration]]
* [[Bank of England]]
* [[Modified convexity]]
* [[Central bank]]
* [[Modified duration]]
* [[COVID-19]]
* [[Deflation]]
* [[Inflation]]
* [[Inflation target]]
* [[Monetary Policy Committee]]
* [[Stagflation]]
* [[Tightening]]
* [[ZLB problem]]
 
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Financial_products_and_markets]]

Latest revision as of 10:43, 12 June 2020

Economics.

A situation in which inflation is positive, but very low, for example below the (positive) inflation target of the central bank.


The economic impacts of Covid-19 to date
"At present, if we overdo the stimulus somewhat and then find the economy recovers strongly, we have ample tools and time to tighten policy again before persistent excess demand and inflation become a problem ...
Conversely, if we provide too little stimulus, the economy could slip into a lowflation trap that is much harder to escape, with greater long-term costs from business failures and high unemployment."
Michael Saunders, External Member of the Bank of England's Monetary Policy Committee (MPC), May 2020.


See also