What at An Anchors hors for r the e Na Natural ral Ra Rate e - - PowerPoint PPT Presentation

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What at An Anchors hors for r the e Na Natural ral Ra Rate e - - PowerPoint PPT Presentation

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What at An Anchors hors for r the e Na Natural ral Ra Rate e of In Inter terest est? Claudio audio Borio, io, Piti Disyatat atat and d Phuric icha hai Rungc ngcha haroenk oenkit itku kul 7 September 2018 Federal Reserve

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What at An Anchors hors for r the e Na Natural ral Ra Rate e of In Inter terest est?

Claudio audio Borio, io, Piti Disyatat atat and d Phuric icha hai Rungc ngcha haroenk

  • enkit

itku kul 7 September 2018 Federal Reserve Bank of Boston Annual Conference

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Prevailing explanations

  • Natural rate, S-I factors

– Secular stagnation, savings glut, safe asset shortage

  • Monetary factors “neutral” in the long-run

What if…

  • Market rates diverged from natural rate persistently
  • Monetary policy not neutral in the long-run

– Financial cycle

Sec ecular dec ecline e in rea eal inte teres est t rate tes

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S-I a theory for the natural rate applied to market rate

  • Equality to market rate a maintained hypothesis
  • Underlying theory not tested

A long historical perspective (Borio et al (2017))

  • Since 1870-2016, 19 countries
  • Direct link with “usual suspects”

– Growth, productivity, demographics, income distribution, relative price of capital

Rea eal inte teres est t rate tes and S-I facto tors

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SLIDE 4

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Link k or no link?

Per cent Per cent

Rea eal inte teres est t rate tes and S-I facto tors

Note: Median values of 19 advanced countries

Per cent Years

+ + –

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(1) Full sample (2) Gold standard (3) Interwar (4) Postwar (5) Pre-Volcker (6) Post-Volcker GDP growth (+) –0.09** –0.00 –0.07 0.08 0.07 0.03 Population growth (+/–) –0.83* –0.50 0.25 –0.77** –0.00 –0.68 Dependency ratio (+) 0.02 –0.03 –0.04 0.03 0.14*** –0.03 Life expectancy (–) 0.04 –0.20*** 0.41 0.23** 0.47*** –0.32*** Relative price of capital (+) 0.01 0.11** –0.06 –0.00 –0.06* 0.01 Income inequality (–) 0.10* –0.01 0.00 –0.26*** –0.10 –0.10 Constant –1.97 15.33*** –17.90 –14.27* –42.48*** 31.18***

Rea eal inte teres est t rate tes and S-I facto tors

Usual al suspect ects: s: No Not guilty ty

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Monetary ary regim imes s and real long-te term rm rate

Per cent

Rea eal inte teres est t rate tes and S-I facto tors

  • Globally, monetary policy of anchor countries
  • utperform S-I factors
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Key elements

  • Change in relative demand/supply of safe assets
  • Higher spread between risky and safe assets

But…

  • Conceptual and empirical drawbacks

Safe a e asse set t shor

  • rta

tage ge?

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Premia ia and spread ads: s: widen en or tighten? hten?

Per cent Per cent

US equity excess returns US corporate bond spreads

Safe a e asse set t shor

  • rta

tage ge?

Source: Jorda et al (2017)

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Per cent Per cent

Global corporate bond OAS 10-year sovereign bond term premia

Safe a e asse set t shor

  • rta

tage ge?

Premia ia and spread ads: s: widen en or tighten? hten?

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Safe a e asse set t shor

  • rta

tage ge?

Sign gn-re restri stricte cted d VAR: Contribu ibutio tion n of SAS small l

Historical decompositions of real 5y5y rate (Percent)

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Natural rate model-dependent

  • Inflation sufficient?
  • Equilibrium should be sustainable

– Financial instability incompatible with sustainability – Defitinition of natural rate should encompass “financial equilibrium”

The long hand of the financial cycle

  • Credit booms predict busts
  • Busts leave long-lasting scars
  • Monetary non-neutrality

What compas ass s for m monetary policy?

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Key Ideas (Juselius et al. (2017))

  • Financial cycle anchored to two long-run relationships

that pin down sustainable credit-GDP ratio – Leverage gap

𝑚𝑓𝑤𝑢 = 𝑑𝑠

𝑢 𝑠 − 𝑧𝑢 𝑠 − 𝛾𝑚𝑓𝑤𝑞 𝐵,𝑢 𝑠

− 𝑚𝑓𝑤

– Debt service gap

𝑒𝑡𝑠𝑢 = 𝑑𝑠

𝑢 𝑠 − 𝑧𝑢 𝑠 + 𝛾𝑒𝑡𝑠𝑗𝑀,𝑢 − 𝑒𝑡𝑠

where 𝑑𝑠

𝑢 𝑠 = real credit, 𝑧𝑢 𝑠 = real output, 𝑞 𝐵,𝑢 𝑠

= real asset price, 𝑗𝑀,𝑢 = nominal average lending rate on stock of credit

  • Credit-to-GDP, real asset prices, and nominal lending rate

proportional in the long-run

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An An em empirical al mod

  • del

el

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US Leve verage rage and d Debt bt Service ice Gaps aps

Per cent

An An em empirical al mod

  • del

el

Source: Juselius et al. (2017)

The two gaps interact…leading to endogenous cycles

  • Output effects large and very persistent
  • Crisis not result of shocks
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Policy cy can smoot

  • th the financi

ancial al cycle

An An em empirical al mod

  • del

el

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Wha hat t anc ncho hors rs for th the na natu tural l rate te of int ntere rest st?

Per cent

An An em empirical al mod

  • del

el

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Underlying theme

  • Multiplicty of outcomes subject to policy
  • Path-dependency

– Busts linked to booms – CB reaction function conditions vulnerability to boom- bust, thus intertemporal policy trade-off

A t A theo eoret etical mod

  • del

el

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Key features

  • OLG of firms and households; financing essential
  • Strategic complimentarity among banks

– Pool of borrowers depends on loan rate

  • Multiple equilibria

– Boom: low rate, ample credit, high output – Bust: high rate, scarce credit, low output – Regime switch conditional on bank capital

  • Policy determines risk-taking, hence bank profits

and evolution of bank capital

A t A theo eoret etical mod

  • del

el

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Monetary ary hysteresis esis

A t A theo eoret etical mod

  • del

el

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Monetary ary hysteresis esis

A t A theo eoret etical mod

  • del

el

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What anchors for the natural rate of interest?

  • Path-dependence implies that asymmetric policy

may bias rates down over successive cycles

  • Endogneity of natural rate to policy undermine it as

anchor for policy Policy frameworks

  • Monetary policy is the ultimate financial anchor; Sets

the price of leverage

  • Potential for highly persistent effects needs to be

recognized;

– Monetary policy is the wind

Co Conclusi sion

  • n
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FOSTERING RESEARCH INFORMING POLICY www.pier.or.th