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on Financial Development and Growth |
| By: | Juselius, Mikael; Borio, Claudio; Disyatat, Piti; Drehmann, Mathias |
| Abstract: | Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing medium-term economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. As a result, policy rates have been persistently and systematically below this measure. Moreover, we find that monetary policy, through the financial cycle, has a long-lasting impact on output and, by implication, on real interest rates. Therefore, a narrative that attributes the decline in real rates primarily to an exogenous fall in the natural rate is incomplete. The influence of monetary and financial factors should not be ignored. Exploiting these results, an illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to higher output even in the long run. |
| Keywords: | natural interest rate, financial cycle, monetary policy, credit, business cycle |
| JEL: | E32 E40 E44 E50 E52 |
| Date: | 2016–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_024&r=fdg |
| By: | Carlos Garriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California-Santa Barbara and NBER); Roman Šustek (Queen Mary University of London, Centre for Macroeconomics, and CERGE-EI) |
| Abstract: | Standard models used for monetary policy analysis rely on sticky prices. Recently, the literature started to explore also nominal debt contracts. Focusing on mortgages, this paper compares the two channels of transmission within a common framework. The sticky price channel is dominant when shocks to the policy interest rate are temporary, the mortgage channel is important when the shocks are persistent. The first channel has significant aggregate effects but small redistributive effects. The opposite holds for the second channel. Using yield curve data decomposed into temporary and persistent components, the redistributive and aggregate consequences are found to be quantitatively comparable. |
| Keywords: | Mortgage contracts, Sticky prices, Monetary policy, Yield curve, Redistributive vs. aggregate effects. |
| JEL: | E32 E52 G21 R21 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp801&r=fdg |