George Evans, 20 September 2017

What are the constraints of the zero lower bound? In this video, George Evans explains how sufficiently large fiscal stimuli can be used to avoid stagnation. This video was recorded in July 2017 at a macroeconomics conference organised by the Bank of England.

Giancarlo Corsetti, Gernot Müller, Keith Kuester, 16 September 2017

The classic rationale for flexible exchange rates was that policymakers would be unconstrained by currency targets. The Great Recession, however, saw numerous central banks constrained instead by the zero lower bound. This column considers which exchange rate regime is best for small open economies in a global recession. The model suggests that if the source of the shock is abroad and foreign interest rates become constrained at their zero lower bound, then flexible exchange rates do provide a great deal of insulation to the domestic economy.

Ricardo Caballero, Alp Simsek, 30 August 2017

Interest rates continue to decline across the globe, while returns to capital remain constant or increasing. The reasons for this widening risky-safe gap are wide-ranging. This column illustrates the secular rise of risk intolerance in the global economy, and summarises a new macroeconomic framework suitable for this environment. It uses this framework to discuss the current global macroeconomic context, its underlying fragility, and the coexistence of low equilibrium interest rates and high speculation.

Sayuri Shirai, 31 July 2017

Portfolio rebalancing through large-scale asset purchases is one of the major transmission channels under the zero lower bound. This column assesses whether the channel has been effective in Japan, focusing in turn on financial institutions, firms, and households. Japanese firms and households are notoriously risk averse, limiting the effectiveness of the portfolio rebalancing channel. These results suggest that more drastic structural reforms and growth strategies are needed.

Daniel Gros, 12 June 2017

Exiting from unconventional monetary policies is now a key issue for central banks, and especially for the US Federal Reserve. This column argues that the Fed already began this exit some time ago, and that the relevant part of its balance sheet has already shrunk by about one quarter of GDP. Pursuing the current policy of reinvesting would lead to a full exit within ten years.

The Editors, 08 April 2017

Central banks are now moving towards exiting from quantitative easing and other unconventional monetary policies. This column highlights a 2013 CEPR/ICMB report that examined the policy challenges surrounding this difficult and unprecedented task. It explores ways policymakers could handle exit and its long-run implications. This is part of the CEPR Flashbacks series that highlights the relevance of past CEPR reports to today’s challenges.

Our CEPR Flashbacks highlight past CEPR reports relevant to today’s challenges. This column highlights a report first published in 2013, which examined how the exit from unconventional monetary policies could be handled by policymakers, what the post-exit world will look like, and the long-run implications for central banks. 

Morten Ravn, Vincent Sterk, 11 January 2017

Recent economic events cast doubt on the standard macroeconomic models. This column looks at new economic models built on the idea that inequality and income risk matter for the business cycle and long-run outcomes. While still in their infancy, these models show promise in addressing the concerns about the old New Keynesian models, and in bringing about a shift in the way that macroeconomists think about aggregate fluctuations and stabilisation policy. 

Alberto Alesina, Gualtiero Azzalini, Carlo Favero, Francesco Giavazzi, Armando Miano, 16 December 2016

When a government wants to cut a deficit, it must decide both how and when to do it. Research has treated the two questions as if they are independent, which risks attributing good policy to good timing, or vice versa. This column argues that when the effects are considered simultaneously, the composition of fiscal adjustments is much more important than the state of the cycle. Fiscal adjustments based upon spending cuts have losses that are on average close to zero, while those based upon tax increases are associated with large and prolonged recessions, regardless of whether or not the adjustment starts in a recession. 

Alex Cukierman, 15 October 2016

The decline in long-term interest rates has nurtured the view of a persistent shift of the natural rate into negative territory. This column argues that existing estimates of the natural rate, based on the New Keynesian model, are likely to be biased downward. It makes a case for introducing long-term risky natural rates into the analysis of monetary policy, which could shed more light on the role of risk attitudes, the structure of financial institutions, and regulation in the determination of potential output and economic activity.

Carlos Garriga, Finn Kydland, Roman Šustek, 16 October 2016

Central banks responded to the financial crisis by cutting policy rates to prevent deflation and curb the decline in economic activity, but these responses have been anything but temporary. This column explores whether the sticky price channel is still relevant in an environment of persistently low rates. Although the effectiveness of the sticky price channel is limited, monetary policy instead transmits through mortgage debt. The recent period of low rates and low inflation has redistributed income and consumption from savers to mortgage borrowers.

Jan in 't Veld, 09 September 2016

The spillover effects of a fiscal stimulus in normal times are likely to be small, at best. This column argues, however, that when interest rates are stuck at the zero lower bound and monetary policy does not offset the expansion, public investment in surplus countries could have significant positive GDP spillovers to the rest of the Eurozone. Given current low borrowing costs, the increase in government debt for surplus countries would be modest, while debt ratios in the rest of the Eurozone could be improved.

Patrick O'Brien, Nuno Palma, 03 September 2016

Today's unconventional central bank policies have historical precedent. One example is the suspension of convertibility of banknotes into gold by the Bank of England between 1797 and 1821. This column argues that, although there were important differences between then and now, it demonstrates that bank reputation and interaction between bank and state are vital to the success of unconventional policies. Also, short-term unconventional policies may persist long after a crisis has passed.

Laurence Ball, Joseph Gagnon, Patrick Honohan, Signe Krogstrup, 02 September 2016

This column presents the latest Geneva Report on the World Economy, in which the authors argue that central banks can do more to stimulate economies and restore full employment when nominal interest rates are near zero. Quantitative easing and negative interest rates have had beneficial effects so far and can be used more aggressively, and the lower bound constraint can be mitigated by modestly raising inflation targets.    

Marco Di Maggio, Marcin Kacperczyk, 19 July 2016

The zero lower bound policy for nominal interest rates was implemented to stimulate sluggish economic growth and boost employment. This column explores whether this policy had unintended effects on the money market fund industry. Traditionally enjoying relatively low and safe returns, money market funds could respond to the low interest rate environment by either exiting the market or changing product offerings and accepting higher portfolio risk. The results show evidence of both, and point to an important but neglected channel for monetary policy transmission.

Paul De Grauwe, Yuemei Ji, 07 July 2016

Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks. In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.

Michiel van Leuvensteijn, Adrian van Rixtel, Bing Xu, 12 June 2016

The unprecedented accommodative monetary policy stance implemented across the world in recent years has pushed interest rates to the zero lower bound, and even into negative territory. Based on an analysis of regulated floors and ceilings in bank loan and deposit interest rates in China, this column argues that when lending rates are close to regulatory imposed floors and hence cannot fall much further, the measurement of bank competition using more traditional measures of competition is flawed. This is important because lower bank competition has detrimental effects on the pass–through of interest rate changes and reduces risk-taking by banks.

Mark Cliffe, 26 February 2016

As doubts grow about the effectiveness of quantitative easing, monetary policymakers are leaning towards cutting interest rates further into negative territory as their preferred mode of easing. But this begs crucial and untested questions of whether banks will be willing to pass on the cost to their retail depositors, and of how depositors might react if they did so. This column notes a recently published survey in which a large majority of respondents said that they would withdraw their savings, and yet few would spend more. Although it could be argued that savers might react less negatively when confronted with the reality of negative rates, their powerful aversion to the prospect raises troubling questions about the potential effectiveness of this policy tool.

Łukasz Rachel, Thomas Smith, 15 January 2016

Many candidate explanations for the low level of real interest rates have been put forward. Less progress has been made on bringing together the different hypotheses into a unifying framework, on quantifying their relative importance and on predicting the future path for real interest rates. This column attempts to fill that gap, and suggests that persistent shifts to global desired savings and investment are behind the bulk of the fall in real interest rates. Those trends are unlikely to unwind anytime soon, so that the global equilibrium rate is likely to remain low, perhaps settling at or below 1% in the medium to long-run.

Jörg Decressin, Prakash Loungani, 02 December 2015

Internal devaluations have been suggested as a possible policy option for countries in a currency union facing large external deficits. These policy actions seek to restore competitiveness by replicating the outcomes of an external devaluation. This column examines wage moderation as a potential means of internal devaluation for EZ countries. If pursued by several countries, wage moderation can work if monetary policy is not constrained by the zero lower bound, or if supported by quantitative easing. Without sufficient monetary accommodation, it will not deliver much of a boost to output, and may hurt overall EZ output.

John Williams, 26 November 2015

Interest rates have been extremely low since the Global Crisis. This column surveys the recent debate over whether they will remain low, or return to normal. While an unequivocal answer is not possible, the evidence suggests a significant decline in average real rates – perhaps to as low as 1%.

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