November 25, 2021

Losing traction? The real effects of monetary policy when interest rates are low

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Originally published on by Bank of International Settlements . Link to original report

( < 1 min)

by Rashad Ahmed, Claudio Borio, Piti Disyatat and Boris Hofmann
Are there limits to how far reductions in interest rates can boost aggregate demand? In particular, as interest rates fall to very low levels, does the effectiveness of monetary policy in boosting the economy wane? We provide evidence consistent with this hypothesis. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low.

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Losing traction? The real effects of monetary policy when interest rates are low

( < 1 min) by Rashad Ahmed, Claudio Borio, Piti Disyatat and Boris HofmannAre there limits to how far reductions in interest rates can boost aggregate demand? In particular, as interest rates fall to very low levels, does the effectiveness of monetary policy in boosting the economy wane? We provide evidence consistent with this hypothesis. Based on a panel of 18 advanced countries starting in 1985, we find that monetary transmission to economic activity is substantially weaker when interest rates are low.

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Navigating by r*: safe or hazardous?

( < 1 min) by Claudio BorioThe concept of the natural rate of interest, or r-star (r*), has risen to prominence in monetary policy following the Great Financial Crisis. No doubt a key reason for the concept’s newfound prominence has been the further decline of real and nominal interest rates to new lows, which has further constrained monetary policy’s room for manoeuvre. This lecture explores the extent to which the concept can be a useful guide to policy. It concludes that, depending on how it is employed, the concept has the potential of leading policy astray and of complicating the task of regaining the needed policy headroom.

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Back to the future: intellectual challenges for monetary policy

( < 1 min) by Claudio BorioThe central banking community is facing major challenges – economic, intellectual and institutional. A key economic challenge is the need to rebuild room for policy manoeuvre, which has fallen drastically over time. This lecture focuses on the intellectual challenge, ie facts on the ground are increasingly testing the longstanding analytical paradigms on which central banks can rely to inform their policies. It argues that certain deeply held beliefs underpinning those paradigms can complicate the task of regaining policy headroom.

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Non-bank financial institutions and the functioning of government bond markets

( < 1 min) The structure of market making in government bond markets has shifted from a bank-centric model to a hybrid one in which non-bank financial institutions, notably principal trading firms and hedge funds, play an important role alongside banks. This shift has occurred in several countries and, while farthest advanced in liquid segments, is also evident in less liquid segments.

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Choosing the European Fiscal Rule

( < 1 min) Originally published on November 17, 2021 00:00 by Bank of International Settlements . Link to original report Contributing to the ongoing discussions at the European Union level about the potential simplification of its fiscal framework,

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