32,00 €

Download PDF Format Download ePub Format
The Challenge of a Zero Interest Rate Economy

In March 2016, the European Central Bank (ECB) lowered its key interest rate to zero. This measure is quite unusual but, since the 2008 crisis, the problems are such in many countries, particularly in the Eurozone, that new measures had to be taken. In this manner central banks, notably the US Federal Reserve and the ECB, have adopted unconventional monetary policies that consist of flooding the financial systems with liquidity.

In this context of uncertainty, the editorial board has put together an issue around four topics, beginning with the financial causes of the drop in nominal rates and the response of the monetary authorities. The second section deals with the real, underlying causes of instability, which are different from its financial causes. The third section is more particularly concerned with the major challenge that this context of low rates poses for financial intermediaries. Finally, the last section takes up the international and generic causes of low rates for financial markets, which have a high degree of integration and globalization.

Besides this main subject, this issue contains a financial history column devoted to monetary policy during the thirty-year boom period after WWII, as well as two other articles. The first of them addresses the financing by private equity funds or by the market of small and medium-sized companies as well as mid-market firms. The second takes up the stakes and limitations of the internationalization of the renminbi.

REF 121 The Challenge of a Zero Interest Rate Economy

publication : March 2016 344 pages

In memoriam accès libre

Introduction accès libre

drapeau français uk flag

No summary is available for this article.

Hans-Helmut Kotz Jacques Le Cacheux

PDF Format Read

Thoughts on the Zero Lower Bound in Relation to Monetary and Financial Stability accès libre

drapeau français uk flag

The prolonged coexistence of low interest rates and low inflation makes the task of central banks more complicated. In this context, their price stability mandate must be reiterated and strictly adhered to: their 2% target must be maintained, without upward or downward revisions, and their reaction function must aim to prevent any deviation from this target, in either direction. However, this mandate is currently facing three challenges: the potentially perverse effects of non-standard instruments on the banking sector, which requires finding the optimal mix of such tools; the structural rigidities of the European economy, which reduce the efficiency of monetary policy; and lastly, the emergence of risks for financial stability, in particular outside the banking sector, which call for a closer monitoring through macroprudential policy. In the future, protracted low equilibrium rates, the expansion of central bank balance sheets and the increased frequency of economic shocks could result in an in-depth rethinking of financial and monetary stability policies.

Classification JEL : E31 E43 E58


Christian Noyer

PDF Format Read

French Interest Rates: A Historical Perspective accès libre

drapeau français uk flag

This article builds and studies long-term series of French interest rates since the early 19th century: the central bank leading interest rate; the rate of the 3-month paper on the interbank market, the regulated deposit rate of saving institutions (livret A), the yield on long-term safe assets (government securities). Comparisons are made with similar series in the UK and US. In a historical perspective, the current situation (low real and nominal interest rates) seems exceptional and very different from previous periods of interest rate stability (in the 19th century) or low real rates (during times of high inflation). The current level of interest rates does not look like the consequence of a sudden break caused by the crisis; it continues a downward trend that started in the early 1980s.

Classification JEL : E43 E58 G21 N23 N24


Vivien Levy-Garboua Éric Monnet

PDF Format Read

Dysfunctional markets and monetary policy responses

The Financial Crisis: Consequences for Monetary Policy and Monetary Practice accès libre

drapeau français uk flag

This article argues that quantitative easing, one of the two new monetary policy tools, is likely to last but that the other one, forward guidance, is not so successful since transparency will never be sufficient in speculation driven markets. The use of these new monetary tools will also have a significant impact on the theory of monetary policy with their integration in the classical framework. Actually it is now obvious that in an economy relying on well-developed capital markets a central bank can use at least two policy tools, one of them resting on the asset side of its balance sheet.

Classification JEL : E52 E58 G01


Benjamin M. Friedman

PDF Format Read

Monetary Policy in Uncertain Times accès libre

drapeau français uk flag

In crisis times, the central bank is inevitably confronted with greater uncertainty and achieving its monetary policy objective becomes more complex. This paper posits that increased uncertainty should not prevent a central bank from taking informed decisions, but it does require a more cautious assessment and processing of information as well as adopting a broader view of the economy and a more preventive orientation towards emerging risks. Most importantly, it requires a central bank’s readiness to take informed decisions that correspond to its communicated reaction function and to thereby, act under uncertainty and deliver on its mandate.

Classification JEL : E31 E32 E43 E58


John Hutchinson Peter Praet

PDF Format Read

Unconventional Monetary Policy Measures and their Impact on the Markets accès libre

drapeau français uk flag

The Eurosystem has responded to the current crises with several conventional and unconventional measures. In the past few years, rates have been lowered – even into negative territory – and asset purchase programmes have been implemented. Financial markets have changed significantly and the Eurosystem’s extraordinary measures have had a profound role to play in this.

The first purchase programme for covered bonds was aimed at reviving a temporarily dysfunctional market segment. The programme was successful in restoring market confidence, but even at that early stage the Eurosystem faced a time-inconsistency problem. The announcement effect of the purchase programme marginalised the impact of the subsequent purchases. This effect became even more apparent with the announcement of the current Public Sector Purchase Programme. Additionally, market reaction counteracts monetary policy intention when exaggerated expectations fall short of a programme extension. Decision-makers are faced with the problem that effects of monetary stimuli in the transmission process are no longer awaited if new measures are not announced immediately.

Classification JEL : E43 E58 G01 G28


Marco Leppin Joachim Nagel

PDF Format Read

Macroprudential Policy: Unfinished Business for Central Banks accès libre

drapeau français uk flag

Since the Great Financial Crisis of 2007-2009, both advanced and emerging market economies have made progress in setting up macroprudential policy frameworks and implementing macroprudential measures. This article provides a summary of these measures, and discusses a number of challenges ahead: (1) understanding the impact of financial development on the effectiveness of macroprudential tools; (2) minimising leakages and spillovers from applying targeted tools; (3) protecting the private financial sector from sovereign risks; (4) designing new policy tools to reduce systemic risks stemming from capital markets; and (5) finding the right combination of policies and acting early enough in the cumulative endogenous process of building financial imbalances. To find an effective solution to these challenges, it is crucial that macroprudential authorities cooperate domestically and globally.

Classification JEL : E43 E58 G01 G28


Jaime Caruana Ilhyock Shim

PDF Format Read

Economic imbalances: fundamental disequilibria

Three “Seismic” Shifts in the Global Economy and Policy Challenges accès libre

drapeau français uk flag

Three “seismic” shifts in the global economy are identified: (1) a persistent dampening fallout from the property bubbles, busts, and the ensuing financial crises; (2) information communication technology becoming employment-unfriendly; and (3) shift from the demographic bonus phase of young and growing population to the demographic onus phase of aging population. These seismic shifts have both short-run and long-run effects, with strong policy implications. Firstly, aggregate demand is generally weaker. Moreover, aggregate demand becomes less responsive to traditional macroeconomic stimulus. Secondly, many economies are losing flexibility and thus efficiency is declining. Thirdly, since conventional monetary policy turns out to be less effective, central banks are increasingly reliant on using central bank balance-sheets (unconventional policies) as a stabilization device. Lastly, and most importantly, uncertainty is particularly heightened. This heightened uncertainty poses a serious challenge to policy makers.

Classification JEL : E43 E58 G01 J11 J24


Kiyohiko G. Nishimura

PDF Format Read

Secular Stagnation? accès libre

drapeau français uk flag

According to some economists, the economy is presently entering a secular stagnation era, i.e. a long period of slow or no economic growth. This situation could be explained either by a declining growth capacity due to low population and innovation growths, either to a weak aggregate demand because of savings exceeding investment. If we are actually entering such a period, several policy tools can be used to reverse the trend, namely fighting inequalities, investing massively to fulfill the huge global infrastructure needs and investing in the new energies sector to fight the on-going global warming.

Classification JEL : E20 E25 O18 O40 O44


Richard N. Cooper

PDF Format Read

Perspectives on Money and Finance: Secular Stagnation or Transformation of Capitalism? accès libre

drapeau français uk flag

After the great financial crisis in 2008, advanced countries have been shackled by low capital return, anemic demand in Europe and deflation worries. A self-fulfilling roundabout process, called secular stagnation, has settled down. Lately emerging market economies have met trouble. Many, China at the top, are plagued with overcapacities in industry, slowdown in foreign trade and a pervasive slump in commodity prices.

Those intertwining processes point out to an incipient transformation of capitalism beyond the sheer impact of the financial crisis. A major feature is the inability of global market finance to fund long-term investments, which would be the drivers of a new growth regime, grounded on sustainable development. Another brand of finance, with public development banks at the core, will be needed along with an evolution of the international monetary system to multilateralism and acceptance of the SDR as international liquidity.

Classification JEL : N20 O16 P16


Michel Aglietta

PDF Format Read

The Comeback of the Keynesian Economy accès libre

drapeau français uk flag

Pre-crisis standard macroeconomic models, qualified as neo Keynesian, rely more on the concept of natural rate of interest than on global demand. But new insights in macroeconomic theory build far more realistic models, especially as regards labour and good and services markets. These models renew with the Keynes intuitions – under-consumption, savings paradox – and are more suitable to reality confrontation. The Keynesian or neo-classical pattern should no more be a political or theoretical stake but rather an empirical one. For example, recent econometric studies highlight that the American economy behaves as Keynesian during the biggest crisis but as non Keynesian during smaller ones. This should be a guide for policy makers.

Classification JEL : E12 E13 E17


Xavier Ragot

PDF Format Read

Deflation and Zero Interest Rates: Underlying Causes, Implications for Economic Policies and Consequences for the Financial Sector accès libre

drapeau français uk flag

This article first describes the fundamental causes of a deflation: a situation of excess of supply of goods and services which cannot be corrected anymore by the reduction in real interest rates. It shows afterwards that, in a deflation, the economic policies which have positive effects in normal circumstances become dangerous. It examines finally the effects on the macro-financial equilibrium of the situation of interest rates at the zero bound limit.

Classification JEL : E31 E44


Patrick Artus

PDF Format Read

Negative Rates: Handgun or Distress Signal? accès libre

drapeau français uk flag

The negative nominal rates currently applied to some sovereign and banks, which refinance at negative interest rates offered by some central banks, have swept aside the zero-lower bound assumption. Although they seem to increase the leeway of monetary policy, are the negative rates a controlled consequence of the unconventional monetary policy? Or do they much more reflect the threats of deflation and the unfavorable macroeconomic situation, or even worse, do they appear as an early warning of secular stagnation? What if the recovery relied more on the yield of productive investment (i.e. the natural rate as defined by Wicksell) than the level of market interest rates? This return to the Wicksell’s natural interest rate approach brings a key issue: to prevent both deflation and secular stagnation, should the monetary rate be perpetually cut to new lows? Or should we try to raise the natural rate? In that case, how to raise the natural rate?

Classification JEL : E31 E43 E52 E58


Jézabel Couppey-Soubeyran

PDF Format Read

Low rates and financial intermediation

Quantitative Easing: The Challenge for Households’ Long-Term Savings and Financial Security accès libre

drapeau français uk flag

QE implies heavy consequences for the financial security of households, which strongly demand capital guarantees on their long-term savings so to have financial predictability and be able to plan for retirement income support or large asset purchases. Insurance companies as part of life insurance contracts have typically provided such capital guarantees. The paper makes three points. First, if long-term interest rates are zero, it will be difficult for households to obtain long-term savings guarantees because the insurance sector will not be able to provide them. Second, long-term savers face a catching-up problem, as the savings returns are now below the price increase of the two main long-term savings objectives: healthcare and housing. Third, the rising costs of urban dwelling implies that a rising part of household income is devoted to expenditure on housing, which means that such savings are not available for more productive uses in the economy.

Classification JEL : E21 E43 G22 I13 R21


Christian Thimann

PDF Format Read

How to Invest Savings in a Very Low Rate Environment? accès libre

drapeau français uk flag

The very low rate environment in the euro zone is a challenge for longer term savings. This deliberate monetary policy is here to stay according to the ECB at least until the economy recovers in full. Savers and their advisers have progressively understood that solutions successful in the past decades are no longer relevant. New product like eurocroissance, absolute return funds and reallocation to real assets, stocks and real estate need now to be considered. Nevertheless savers are reluctant to change their habits and invest in new vehicles, in particular because their weak financial literacy.

Classification JEL : E21 E43 G23


Jean-François Boulier

PDF Format Read

Euro Area Shadow Banking Activities in a Low-Interest-Rate Environment: A Flow-of-Funds Perspective accès libre

drapeau français uk flag

Very low policy rates as well as the substantial redesign of rules and supervisory institutions have changed background conditions for the Euro Area’s financial intermediary sector substantially. Both policy initiatives have been targeted at improving societal welfare. And their potential side effects have been discussed intensively, in academic as well as policy circles. Very low policy rates and correspondingly low market rates are likely to whet investors’ risk taking incentives. Concurrently, the tightened regulatory framework, in particular for banks, increases the comparative attractiveness of the less regulated, so-called shadow banking sector. Employing flow-of-funds data for the Euro Area’s non-bank banking sector we take stock of recent developments in this part of the financial sector. In addition, we examine to which extent low interest rates have had an impact on investment behavior. Our results reveal a declining role of banks and, simultaneously, an increase in non-bank banking. Overall intermediation activity, hence, has remained roughly at the same level. Moreover, our findings also suggest that non-bank banks have tended to take positions in riskier assets, particularly in equities. In line with this observation, balance-sheet based risk measures indicate a rise in sector-specific risks in the non-bank banking sector when narrowly defined.

Classification JEL : E43 G11 G21 G23


Hans-Helmut Kotz Günter W. Beck

PDF Format Read

Le grand large – The international context

Low Long-Term Interest Rates as a Global Phenomenon accès libre

drapeau français uk flag

With much stronger international linkages between long-term interest rates in different currencies, ultra-low interest rates have become a global phenomenon. The real equilibrium policy rates (the natural rate) has fallen in many countries. Term premia in bond markets are low or even negative in many currencies. The fundamental causes of these developments, which suggest that the “new normal” for interest rates is lower than in the past, are still under debate. Time will tell.

Classification JEL : E43 E52 F41 G15


Philip Turner Jhuvesh Sobrun

PDF Format Read

Financial Futures: From the Great Moderation to ZIRP and Beyond accès libre

drapeau français uk flag

Financial crises have been an enduring phenomenon of the contemporary international economic environment. These crises tend to have two features in common. First, they are associated with very large capital flows. Second, they are triggered by relatively small differences in macroeconomic fundamentals, which encourage capital inflows, which in turn exacerbate the macroeconomic divergences. The result has been a series of boom-bust capital flow cycles. The crises that have ensued have been devastating. The experience of the past 25 years would appear to suggest the desirability of some form of international macroeconomic policy coordination to avoid a recurrence of these sorts of debilitating crises.

Classification JEL : E32 E61 F31 F32 F42 G01


Jeffry Frieden

PDF Format Read

Financial history column

French Monetary Policy during the Trente Glorieuses accès libre

Articles

SME’s Equity Financing: Stock Market or Private Equity? accès libre

drapeau français uk flag

Over the last 30 years SME’s French financial markets have a long history of failure for financing SMEs and mid-market companies whereas private equity financing has been increasingly financing them. Relying on academic literature, this paper highlights that private equity is best fitted to preserve financial independence, an important feature of many SME’s shareholders and managers. This should be taken into account by policy makers.

Classification JEL : G23 G24 G32 L25


Xavier Mahieux

PDF Format Read

Internationalization of the Renminbi: Challenges and Limits of Institutional Reforms accès libre

drapeau français uk flag

The internationalization of the Renminbi (RMB) has been drawing attention from both political scientists and economists, since the end of 2000s. Available data indicate a strong growth of RMB usage at the international level. This article has two main objectives. First, it aims to describe the qualitative evolutions of the Chinese currency by analysing the changes in the institutional framework of RMB. The second section deals with the ambitions of and obstacles to the Chinese strategy of internationalisation of its currency. For these purposes, this article focuses on the rich literature on this topic. Given that China’s monetary upheaval involves a conflicting process both at the domestic and international levels, it generates tensions with other rival powers, first and foremost the United States. This article examines the willingness and ability of China to overcome hurdles to achieve further the internationalisation of its currency.

Classification JEL : E42 F31 F33 F40 F55


Adrien Faudot

PDF Format Read
Share email Share on Facebook Share on Twitter Share on Google+