Alejandro Van der Ghote, 15 December 2021

Short-term interest rates, particularly the natural rate, have been in steady decline in the euro area and the US. This column argues that in economies with low natural rates, such as the euro area today, macroprudential policy can have benefits for the effectiveness of conventional monetary policy, in addition to safeguarding financial stability. Notably, macroprudential policies that curb leverage of financial intermediaries during upturns can also help stimulate aggregate demand during downturns, by containing systemic risk in financial markets.

Davide Porcellacchia, 18 October 2021

Policy rates in advanced economies are unusually low. This phenomenon has competing effects: low rates harm bank profits by squeezing interest margins, but also boost the value of long-term assets held by banks. Using a standard banking model, this column determines the policy rate level at which these two forces cancel out, or the ‘tipping point’. Past this tipping point, the net effect of low rates on bank capital is negative. Applying the model to the US economy, the tipping point in August 2007 is estimated as a policy rate of 0.55%.

Sebastian Barnes, Eddie Casey, 09 June 2020

The Covid-19 crisis has highlighted the role of fiscal policy and transformed the outlook for public finances. This column explores economic and fiscal scenarios for a small euro area country to 2025. Due to the high uncertainty, it argues for a state-contingent approach to policy. Low interest rates, if maintained, along with ‘high-altitude’ debt dynamics could create substantial headroom for the fiscal response and make future adjustments to put the debt ratio on a downward path more manageable.

Giuseppe Ferrero, Mario Pietrunti, Andrea Tiseno, 21 March 2019

Dealing with uncertainty about the state of the economy is one of the main challenges facing monetary policymakers. In recent years there has been an extensive debate on the value of some of the deep parameters driving the economy, such as the natural rate of interest and the slope of the Phillips curve, estimates of which are quite uncertain. This column argues that when facing uncertainty on the structural relationship among macroeconomic variables, central banks should adopt a pragmatic and data-dependent approach to adjusting their monetary policy stance. 

Matthieu Bussière, Menzie Chinn, Laurent Ferrara, Jonas Heipertz, 05 July 2018

The ‘Fama puzzle’ is the finding that ex post depreciation and interest differentials are negatively correlated, contrary to what theory suggests. This column re-examines the puzzle for eight advanced country exchange rates against the US dollar, over the period up to February 2016. The rejection of the joint hypothesis of uncovered interest parity and rational expectations still occurs, but with much less frequency. In contrast to earlier findings, the Fama regression coefficient is positive and large in the period after the Global Crisis, but survey-based measures of exchange rate expectations reveal greater evidence in favour of uncovered interest parity.

Shang-Jin Wei, 25 June 2013

The Chinese central bank has recently dropped hints that it will quicken the pace of interest-rate reforms, moving towards a more market-determined regime. Will this reduce China’s ‘excessive’ savings and current-account surplus? This column argues that it won’t. While the interest-rate reform may carry many benefits, reducing the country’s current-account surplus is not one of them.

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