Willem Buiter, 03 July 2020

The US Federal Reserve – the world’s most important central bank – is not in a good place. This column outlines three flaws in the operating practices of the Fed – (i) its refusal to adopt negative policy rates, (ii) the build-up of significant credit risks through non-transparent (quasi-)fiscal actions, and (iii) stress testing analysis which fails to account for the severity of the COVID-19 crisis. It proposes a number of ways forward, including a symmetric policy rate around zero, a temporary ban on dividend payments, new equity issuance, and conducting a comprehensive stress test of the financial system.

Oliver de Groot, Alexander Haas, 16 June 2020

The magnitude of the COVID-induced economic downturn is forcing central banks around the world to rethink the set of monetary policy tools available to them. Many central banks have long shied away from negative interest rates, concerned about the impact on bank profits and financial stability. This column explores how negative interest rate policies can be used by central banks to signal a commitment to a prolonged period of monetary accommodation. Using a quantitative monetary model, it shows that the signalling channel of negative interest rates can result in a rise in banks’ net worth even if net interest margins shrink.

Andrew Lilley, Kenneth Rogoff, 17 April 2020

In the aftermath of the Global Crisis, conventional monetary policy has been constrained by low interest rates in many major economies. This has spurred debates on the possibility of introducing negative interest rates in the monetary policy toolkit. This column uses evidence from the US to show that not only do the markets expect the low interest rates to persist into the future, but they also expect the use of negative interest rates down the line. Moreover, markets no longer believe that even quantitative easing can bring inflation to target, which leaves very few alternatives for monetary policy apart from negative interest rates.

Florian Heider, Farzad Saidi, Glenn Schepens, 17 December 2019

In recent years, several central banks have steered policy rates into negative territory for the first time in their history. The novel nature of negative rates raises several questions about how monetary policy operates in such non-standard territory. This column summarises recent research that focuses on the impact of negative policy rates on bank credit supply and bank risk-taking in the euro area. The findings point to a crucial role for bank deposits in the transmission mechanism of negative rates.

Paweł Kopiec, 06 December 2019

Research shows that individual spending behaviour is heterogeneous across households and that it depends on characteristics such as income and wealth. Using Italian data, this column shows that household heterogeneity plays a crucial role in the propagation of fiscal expenditure shocks. Household inequality gives rise to a rich set of new channels that propagate government expenditures shocks through consumer spending, which are related to households’ balance sheets and monetary-fiscal interactions. The values of the fiscal multiplier diverge from those predicted by the standard macroeconomic framework and the difference is particularly large at the zero lower bound.

Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton, 08 November 2019

Economists and policymakers continue to question the effectiveness of monetary policy when an economy faces near-zero or sub-zero interest rates. Sceptics argue that central banks cannot stimulate lending, and may indeed decrease the loan supply, by setting negative interest rates. This column shows that negative rates do not impede the transmission of monetary policy from banks to deposit holders because firms do not withdraw cash in response to negative rates the way households might. In fact, sub-zero rates may even stimulate the economy by encouraging firms to invest.

Philippe Andrade, Jordi Galí, Hervé Le Bihan, Julien Matheron, 01 October 2019

How to adjust to structurally lower real natural rates of interest is a challenging but inescapable issue for central bankers. Using simulation and US data, this column studies how changes in the steady-state natural interest rate affect the optimal inflation target. It finds that starting from pre-crisis values, a 1 percentage point decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9 to 1 percentage point. It also discusses alternatives to adjusting the target, such as non-conventional monetary policies. 

Charles Wyplosz, 17 June 2019

Olivier Blanchard, Lawrence H. Summers, 13 May 2019

The changes in macroeconomic thinking prompted by the Great Depression and the Great Inflation of the 1970s were much more dramatic than have yet occurred in response to the events of the last decade. This column argues that this gap is likely to close in the next few years as a combination of low neutral rates, the re-emergence of fiscal policy as a primary stabilisation tool, difficulties in hitting inflation targets, and the financial ramifications of a low-rate environment lead to important changes in our understanding of the macroeconomy and in policy judgements about how to achieve the best performance.

Marcin Bielecki, Michał Brzoza-Brzezina, Marcin Kolasa, 05 March 2019

Population ageing is likely to affect many areas of life, from pension system sustainability to housing markets. This column shows that monetary policy can be considered another victim. Low fertility rates and increasing life expectancy substantially lower the natural rate of interest. As a consequence, central banks are more likely to hit the lower bound constraint on the nominal interest rate and face long periods of low inflation, especially if they fail to account for the impact of demographic trends on the natural interest rate in real time.

Carlo Altavilla, Wolfgang Lemke, Roberto Motto, Natacha Valla, 28 February 2019

The ECB Conference on Monetary Policy took place in Frankfurt from 29 to 30 October 2018. This column describes presentations on topics including the interaction of monetary policy and financial markets, the relevance of banks and credit flows for monetary policy transmission, and the current challenges for monetary policy frameworks and strategies. The conference provided a forum for academic research and the practice of central banking to meet. 

Ralf Fendel, Nicola Mai, Oliver Mohr, 17 January 2019

The flattening of the US yield curve has left academics, central bankers and market commentators divided, with one camp interpreting it as a sign of impending recession (in line with historical patterns), and the other camp arguing that this time is different given unprecedented changes in monetary policy and other structural forces. This column argues that the ECB’s quantitative easing programme undermined the performance of term spreads as predictors of recessions. It suggests and tests a modified term spread and several other variables that are more successful at predicting recessions. 

Jose A. Lopez, Andrew Rose, Mark Spiegel, 02 October 2018

Many countries have now adopted negative nominal interest rates. The column uses data on 5,000 banks affected by this policy to conclude that, while their net income has not fallen, strategies to increase non-interest income are unlikely to be sustainable. Therefore we cannot assume that bank performance and lending will carry on at current levels over extended periods of negative policy rates.

Antonio Fatás, 28 September 2018

The damage done by procyclical fiscal policy in the euro area between 2010 and 2014 is likely to be even larger than previous studies have suggested. The column argues that fiscal policymakers at the time created a 'doom loop', with unfounded pessimism feeding into policy, and the consequences of those policies increasing pessimism. This has created hysteresis, permanently reducing GDP. 

Paul Schmelzing, 24 May 2018

Growth rates have been stubbornly low since the financial crisis, and many have noted that the interest rate environment has been weakening since the 1980s. This column places recent episodes in the context of longer-term economic history, going back to the 14th century. Trends over recent decades are generally in line with a long-term ‘suprasecular’ trend of declining real rates. Negative real rates could become a more frequent phenomenon, and indeed constitute a ‘new normal’.

Jan Willem van den End, Marco Hoeberichts, 25 April 2018

Persistent low interest rates prompt the question of whether the natural, or equilibrium, rate of interest has similarly shifted downwards. This column uses data for seven OECD countries to explore how low interest rates have affected potential output. The results lend support to concerns that a prolonged period of low real interest can reduce the natural rate. This causality can run through both real and financial channels.

Seppo Honkapohja, Kaushik Mitra, 09 April 2018

The Global Crisis and Great Recession dealt a blow to inflation targeting as a good monetary policy framework, and several prominent economists and central bankers have suggested that price-level targeting could help in bringing the economy back to normal. This column argues that although a newly established policy regime could well have low initial credibility, this may not be a problem as credibility can improve over time and lead to convergence toward the target equilibrium.     

Gianluca Benigno, Luca Fornaro, 15 March 2018

Existing research offers little guidance to policymakers who want to understand the interactions between economic fluctuations, growth, and stabilisation policies. This column introduces a Keynesian growth framework that provides a theory of long-run growth, built on a Keynesian approach to economic fluctuations. In the model, pessimistic expectations about future growth can give rise to stagnation traps. It suggests that monetary policy during a stagnation trap is hindered by credibility issues.

Gauti Eggertsson, Ragnar Juelsrud, Ella Getz Wold, 31 January 2018

Economists disagree on the macroeconomic role of negative interest rates. This column describes how, due to an apparent zero lower bound on deposit rates, negative policy rates have so far had very limited impact on the deposit rates faced by households and firms, and this lower bound on the deposit rate seems to be causing a decline in pass-through to lending rates as well. Negative interest rates thus appear ineffective in stimulating aggregate demand.

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.


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