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%.

William Easterly, 13 July 2009

The tipping point is a popular theory of social behaviour with many applications. This column says that Thomas Schelling’s original model of racially segregated neighbourhoods, while theoretically attractive, is strongly rejected by US data.


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