Moritz Schularick, Lucas ter Steege, Felix Ward, 12 January 2021

The question of whether monetary policymakers can defuse rising financial stability risks by ‘leaning against the wind’ and increasing interest rates has sparked considerable disagreement among economists. This column contributes to the debate by studying the state-dependent effects of monetary policy on financial stability, based on the ‘near-universe’ of advanced economy financial cycles since the 19th century. It shows that deploying discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them.

Elena Durante, Annalisa Ferrando, Philip Vermeulen, 30 November 2020

Monetary policy affects firms’ investment behaviour through an interest rate channel and a balance sheet channel. This column uses investment data from over one million firms in Germany, Spain, France, and Italy to analyse the transmission of monetary policy shocks. It finds heterogeneity in the effects depending on firm size and industry – young firms and those producing durable goods react more strongly than the average firm. Embedding these findings into macroeconomic models used in policymaking would enhance the information available to decision makers. 

Paweł Baranowski, Wirginia Doryń, Tomasz Łyziak, Ewa Stanisławska, 22 October 2020

To achieve macroeconomic stabilisation, central banks attempt to manage the expectations of the private sector. Decisions on short-term interest rates and communication can both impact expectations, but communication is especially important under the effective lower bound, when the room to move interest rates down is limited. Using data from Poland, this column shows that while monetary policy shapes the expectations of the private sector through both communication and interest rate decisions, the impact can differ depending on the variable forecasted and on the forecasting horizon.

Andrea Presbitero, Ursula Wiriadinata, 05 August 2020

As interest rate-growth differentials (r-g) have turned negative in many countries, now could be the time for governments to pursue fiscal expansions. However, the downside risks of such policies should not be disregarded. Using a large sample of economies, this column finds that high and increasing public debts, especially when denominated in foreign currencies, can lead to more volatile r-g dynamics. In particular, this is associated with higher probabilities of r-g reversals, tail risks, and an increased exposure to domestic and global shocks. Policymakers should take note of these risks when designing future fiscal expansions.

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.

Antonin Bergeaud, Gilbert Cette, Rémy Lecat, 05 December 2019

In most advanced economies, both real long-term interest rates and productivity growth have decreased since the early 1990s. The column demonstrates how a circular relationship links these two indicators. Until there is a technology shock, the relationship will converge to an equilibrium in which growth and interest rates are both low.

Michael Ehrmann, Gaetano Gaballo, Peter Hoffmann, Georg Strasser, 01 August 2019

Forward guidance – communication by a central bank about the likely future path of interest rates – usually reduces uncertainty. This column argues that how this is done in practice matters, however, because forward guidance with a short time horizon can raise uncertainty. This occurs if the forward guidance impairs the aggregation of private information in financial markets, thus making market prices less informative.

Ann Harrison, Marshall W. Meyer, Will Wang, Linda Zhao, Minyuan Zhao, 07 April 2019

The conventional wisdom that privatisation of state-owned enterprises reduces their dependence on the state and yields positive economic benefits has not always been borne out by empirical work. Using a comprehensive dataset from China, this column shows that privatised SOEs continue to benefit from government support in the form of low-interest loans and subsidies relative to private enterprises that have never been state-owned. Although there are clear improvements in performance post-privatisation, privatised SOEs continue to significantly under-perform compared to private firms.

Cristiano Cantore, Filippo Ferroni, Miguel León-Ledesma, 27 March 2019

Despite its importance, there is no systematic empirical evidence on the effect of monetary policy shocks on the share of output allocated to wages. Using data for five developed economies, this column finds that standard models generate the ‘wrong sign’ for the effect when compared to the empirical results, and that the labour share temporarily increases following a positive shock to the interest rate. Using the standard models to analyse the distributional effects of monetary shocks could be misleading.  

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.

Peter Karadi, Marek Jarociński, 03 October 2018

Central bank announcements simultaneously convey information about monetary policy and the economic outlook. This column uses changes in interest rate expectations and stock prices around the time of policy announcements of the Federal Reserve to disentangle the impact of news about monetary policy from that of news about the economic outlook. It finds that both pieces of information play a significant role in the dynamics of inflation and economic growth. Controlling for news about the economy provides a more accurate measure of the transmission of monetary policy.

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.

Felix Geiger, Fabian Schupp, 26 September 2018

In the low interest-rate setting, the Eurosystem’s accommodative monetary policy has been relying to a greater extent on non-standard measures and forward guidance on the future path of policy rates. This column examines how these measures have worked across the term structure and how market expectations have evolved during the phase of low interest rates.The results illustrate that the Eurosystem can continue to influence market participants’ interest rate expectations at the effective lower bound through unconventional monetary policy measures.

Martin Ellison, Andreas Tischbirek, 10 May 2018

The bond premium puzzle arises because the excess yield that investors require to hold a long-term bond is too small in quantitative macroeconomic models. Drawing on the beauty contest literature, this column argues that realistic term premia can be generated by differentiating between private and public information and by introducing strategic complementarities in the formation of expectations. It shows that a significant proportion of US term premia is driven by a beauty contest in forecasting, which rewards investors for being accurate andclose to the average forecast of others.

Philipp-Bastian Brutscher, Jonas Heipertz, Christopher Hols, 23 April 2018

Despite an extensive literature examining the optimal financing mix, little work exists on firms’ preferences over specific debt financing characteristics. This column uses experimental data from Europe to analyse the link between different external financing characteristics and investment decisions. The findings suggest that modest improvements in financing terms can more than double the probability of investment. Investment decisions are particularly sensitive to interest rates and collateral requirements.

Charles Bean, 15 March 2018

Interest rates are near zero and inflation is even lower. Professor Sir Charles Bean, former Deputy Governor at the Bank of England and President of the Royal Economic Society, talks to Mark Thoma about the importance of clear communication in such uncertain times. The interview was recorded at the Royal Economic Society annual conference at The University of Manchester in Spring 2015 and produced by Econ Films.

Ricardo Caballero, Emmanuel Farhi, Pierre-Olivier Gourinchas, 13 December 2017

The US has seen a fall in real interest rates but stable real returns on productive capital in the last few decades. This column argues that these divergent trends are inherently interlinked, and arise from a combination of a rise in the capital risk premium, an increase in monopoly rents from mark-ups, and capital-biased technical change. With these secular trends unlikely to reverse anytime soon, we are likely to live in a prolonged era of low interest rates, high capital risk premia, and low labour share.

Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, Ricardo Reis, 28 November 2017

The usually buoyant London housing market is currently the weakest performing market in the UK. A majority of leading economists think that the phenomenon of declining prices will ripple out from London to the rest of the UK, according to the latest Centre for Macroeconomics and CEPR survey. Asked whether a widespread weakening of the housing market will slow GDP growth significantly, the experts are more divided. Several point to uncertainty about the eventual Brexit outcome making it very difficult to engage in predictions about house prices and growth; others suggest that lower house prices could be a good thing for the UK economy, especially for young people.

Sayuri Shirai, 06 October 2017

Interest rates in many advanced economies have been declining since the 1990s. This column takes a close look at the case of Japan. In 2013 the Bank of Japan pursued a policy of quantitative and qualitative monetary easing that aimed to lower the real interest rate substantially below its natural rate. The evidence suggests that this policy has had mixed success at best, and that the natural rate of interest may decline in the foreseeable future.

Yusuf Soner Baskaya, Julian di Giovanni, Sebnem Kalemli-Ozcan, Mehmet Fatih Ulu, 01 September 2017

Most models assume capital flows are endogenous to the business cycle, and that inflows increase during an economy’s ‘boom’ periods. This column shows that the international no-arbitrage condition in fact does not hold, and that capital flows are pushed into an economy due to high global risk appetite. Controlling for domestic monetary policy responses to capital flows and changes in the exchange rate, exogenous capital inflows lower real borrowing costs and fuel credit expansion.


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