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Summary paper Questions Future Research

Discussion of “Monetary Policy, the financial cycle and ultra-low interest rates”

by M. Juselius, Claudio Borio, Piti Disyatat and Mathias Drehmann Marente Vlekke1

1CPB Netherlands Bureau for Economic Policy Analysis

DNB Workshop on Estimating and Interpreting Financial Cycles, September 2 2016

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Outline

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Summary paper

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Questions

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Future Research

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

What explains the secular decline in real interest rates?

Prevailing views

Dominating explanation: Declining rates reflect decline in the ‘equilibrium’ or ‘natural’ rate of interest (NRI). Low NRI because: higher propensity to save, growing preference for ‘safe’ assets (e.g. Bean et al. (2015)) and recently “Secular Stagnation” (Summers, 2014). Key assumptions: NRI is consistent with Y = Y ∗. Inflation is key signal to determine if Y = Y ∗. → inherent tension between natural rate and financial stability? Juselius et al.: this view is too narrow.

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

What explains the secular decline in real interest rates?

According to Juselius et al.

2 measures of the financial cycle: “leverage gap” (LG) ≈ deviations from credit-to-asset ratio “debt service gap” (DSG) ≈ deviations

i (1−(1+i)−s) ∗ C Y

Findings: Use in VAR → LG and DSG have systematic and lasting impact on Y . Use in state space model → estimates for finance-neutral NRI and Y ∗. Counterfactual experiments: augmented Taylor rule → dampens financial cycle → higher Y , higher NRI.

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

What explains the secular decline in real interest rates?

According to Juselius et al.

A ‘finance neutral’ NRI is higher and declines less than standard NRI. Policy rates structurally lower than NRI → monetary policy too expansionary. Overexpansionary monetary policy → financial booms and busts → decline in Y ∗ → decline NRI.

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Contributions

Links monetary policy to financial cycles. Emphasizes importance of interest rates in credit-to-GDP cycles. Very rich paper: a VAR model, a state space model and 2 counterfactual experiments.

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Questions

Isolating the effect of mortgages

What about effects mortgages vs other assets? (”The Great Mortgaging”, Jord´ a et al. (2014))

Figure: Bank Lending-to-GDP (Source: Jord´ a et al. (2014))

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Questions

Estimation of LG and DSG

DSG and LG are not directly observed → estimate via state space model? Complete the model? Assumptions on

i (1−(1+i)−s) ∗ C Y ?

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Questions

Estimation of LG and DSG

Assumptions on

i (1−(1+i)−s) ∗ C Y ?

Figure: Mortgage types in the Netherlands (Source: DNB)

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research

Future Research

Compare countries. The Euro area: one policy rate, many NRI’s... Analysis effects of different types of assets (mortgages).

Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest