Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.
Dirk Niepelt, Wednesday, January 21, 2015
Philippe Andrade, Richard Crump, Stefano Eusepi, Emanuel Moench, Tuesday, December 23, 2014
Expectations are critical for macroeconomics and financial markets. But the expectation-formation process is not well understood. This column discusses some empirical characteristics of forecast disagreement from professional forecasters in the US, and discusses the ‘information frictions’ that underlie the heterogeneity of expectations.
Jean-Pierre Landau, Tuesday, December 2, 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Kristina Morkunaite, Felix Huefner, Thursday, November 27, 2014
The post-Crisis G7 economies have suffered weak business investment despite record low interest rates and the favourable financial positions of corporates. Some consider this the ‘new normal’ arising from secular, supply-side forces that have contributed to declining potential growth rates. This column argues that structural factors alone are not sufficient to explain the current weakness in investment rates. There is thus room for positive surprise if companies realise the pent-up investment demand.
Loukas Karabarbounis, Brent Neiman, Tuesday, November 25, 2014
The share of compensation to labour in gross value added has declined in recent decades for most countries and industries around the world. Recent work has also used the share of compensation to labour in net value added as a proxy for inequality. This column discusses that gross and net labour shares have declined together for most countries since 1975 – an outcome consistent with the worldwide decline in the relative price of investment goods.
Charles A.E. Goodhart, Philipp Erfurth, Tuesday, November 4, 2014
Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing. This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.
Charles A.E. Goodhart, Philipp Erfurth, Monday, November 3, 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
Jagjit Chadha, Sunday, November 2, 2014
The impact of the stock and maturity of government debt on longer-term bond yields matters for monetary policy. This column assesses the magnitude and relative importance of overall bond supply and maturity effects on longer-term US Treasury interest rates using data from 1976 to 2008. Both factors have a significant impact on both forwards and term premia, but maturity of public debt appears to matter more. The results have implications for exit from unconventional policies, and also for the links between monetary and fiscal policy and debt management.
David Miles, Wednesday, October 22, 2014
Many central banks embrace forward guidance by announcing expected interest rate paths. But how likely it is that actual rates will be close to expected ones? This column argues that quantifying such uncertainty poses great difficulties. Precise probability statements in a world of uncertainty (not just risk) can be misleading. It might be better to rely on qualitative guidance such as: “Interest rate rises will probably be gradual and likely to be to a level below the old normal”.
Karl Walentin, Thursday, September 11, 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Philippe Bacchetta, Kenza Benhima, Sunday, August 24, 2014
Among the various explanations behind global imbalances, the role of corporate saving has received relatively little attention. This column argues that corporate saving is quantitatively relevant, and proposes a theory that is consistent with the stylised facts and useful for understanding the current phase of global rebalancing. The theory implies that, while the economic contraction originating in developed countries has pushed interest rates towards the zero lower bound, the recent growth slowdown in emerging countries could push them out of it.
Coen Teulings, Richard Baldwin, Wednesday, September 10, 2014
The CEPR Press eBook on secular stagnation has been viewed over 80,000 times since it was published on 15 August 2014. The PDF remains freely downloadable, but as the European debate on secular stagnation is moving into policy circles, we decided to also make it a Kindle book. This is available from Amazon; all proceeds will help defray VoxEU expenses.
Claudio Borio, Piti Disyatat, Wednesday, June 25, 2014
Real interest rates have fallen to historic lows, and some economists are concerned that an era of secular stagnation has begun. This column highlights the role of policy frameworks and financial factors – particularly debt – in linking low real interest rates and sluggish economic growth. Policies that do not lean against booms but ease aggressively and persistently in busts induce a downward bias in interest rates over time and an upward bias in debt levels – something akin to a debt trap. Low real interest rates may thus be self-reinforcing and not always ‘natural’.
Vincent Brousseau, Alexandre Chailloux, Alain Durré, Monday, December 9, 2013
In the aftermath of the LIBOR scandal, it is important to re-establish a credible reference rate for the pricing of financial instruments and of wholesale and retail loans. The new candidate must meet the five criteria suggested by the Bank for International Settlements – reliability, robustness, frequency, availability, and representativeness – in all circumstances. This column argues that strengthening governance and/or adopting a trade-weighted reference rate is probably the fastest approach, but not necessarily sufficient for a resilient reference rate in the long run.
Nicolas Magud, Evridiki Tsounta, Wednesday, January 16, 2013
The ‘neutral’ rate is the real interest that is consistent with stable inflation and narrow output gaps. This column discusses the various estimation techniques and presents estimates for a range of Latin American nations. No methodology is fully correct: central banks must still make a subjective judgement, but econometrics can significantly help to inform it.
Sylvester Eijffinger, Rob Nijskens, Friday, November 23, 2012
The Eurozone is moving towards a banking union with the ECB at its centre. This column argues that there are problems with the European Commission’s proposal. The ECB can never supervise all 6000 banks in the Eurozone, supervision should be separated from monetary policy to avoid conflicts of interest, and joint deposit insurance and resolution funds must be created. Furthermore, the ECB should exert constructive ambiguity in its supervision.
Steven Ongena, José-Luis Peydró, Tuesday, October 25, 2011
Do low interest rates encourage excessive risk-taking by banks? This column summarises two studies analysing the impact of short-term interest rates on the risk composition of the supply of credit. They find that lower rates spur greater risk-taking by lower-capitalised banks and greater liquidity risk exposure.
Stefan Gerlach, Laura Moretti, Friday, August 26, 2011
Many observers argue that excessively expansionary monetary policy led to the recent global financial crisis. On the day of Ben Bernanke’s speech in Jackson Hole, this column agrees with the Fed chair that monetary policy was not the main cause. It argues that non-monetary forces drove down real interest rates and lowering nominal rates was the correct response. But central bankers and other regulators vastly underestimated the risks accompanying low short-term interest rates.
Olivier Coibion, Wednesday, June 8, 2011
What effect do interest-rate changes have on economic growth? Most studies suggest that the answer is “not much”. This column points out that a lot of these studies use US data from the early 1980s when monetary policy was under the “Volcker experiment”. When this episode is excluded, this column finds that the implied contribution of policy shocks to historical US business cycle fluctuations is much larger than found in much of the literature.
Filipa Sá, Pascal Towbin, Tomasz Wieladek, Thursday, March 10, 2011
In much of the Western world, the decade prior to the global crisis witnessed soaring house prices. While the debate on its causes continues, this column finds that the property booms owed a significant part of their ferocity to large capital inflows and low interest rates.