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Low for Long? Causes and Consequences of Persistently Low Interest Rates Geneva Reports on the World Economy 17 International Center for Monetary and Banking Studies (ICMB) International Center for Monetary and Banking Studies 2, Chemin Eugène-Rigot 1202 Geneva Switzerland Tel: (41 22) 734 9548 Fax: (41 22) 733 3853 Web: www.icmb.ch © October 2015 International Center for Monetary and Banking Studies Centre for Economic Policy Research Centre for Economic Policy Research 3rd Floor 77 Bastwick Street London EC1V 3PZ UK Tel: +44 (20) 7183 8801 Fax: +44 (20) 7183 8820 Email: [email protected] Web: www.cepr.org ISBN: 978-1-907142-94-9 Low for Long? Causes and Consequences of Persistently Low Interest Rates Geneva Reports on the World Economy 17 Charles Bean London School of Economics and CEPR Christian Broda Duquesne Capital Management Takatoshi Ito University of Tokyo, University of Columbia and CEPR Randall Kroszner Booth School of Business, University of Chicago ICMB INTERNATIONAL CENTER FOR MONETARY AND BANKING STUDIES CIMB CENTRE INTERNATIONAL D’ETUDES MONETAIRES ET BANCAIRES CEPR PRESS The International Center for Monetary and Banking Studies (ICMB) The International Center for Monetary and Banking Studies (ICMB) was created in 1973 as an independent, non-profit foundation. It is associated with Geneva's Graduate Institute of International and Development Studies. Its aim is to foster exchanges of views between the financial sector, central banks and academics on issues of common interest. It is financed through grants from banks, financial institutions and central banks. The Center sponsors international conferences, public lectures, original research and publications. In association with CEPR, the Center has published the Geneva Reports on the World Economy since 1999. These reports attract considerable interest among practitioners, policymakers and scholars. ICMB is non-partisan and does not take any view on policy. Its publications, including the present report, reflect the opinions of the authors, not of ICMB or any of its sponsoring institutions. The President of the Foundation Board is Thomas Jordan and the Director is Charles Wyplosz. Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 900 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean President Richard Portes Director Richard Baldwin Research Director Kevin Hjortshøj O’Rourke About the Authors Charles Bean is a Professor of Economics at the London School of Economics. From 2000 to 2014, he served at the Bank of England as, successively, Executive Director and Chief Economist, and then Deputy Governor for Monetary Policy, in which capacity he was a member of the Monetary Policy and Financial Policy Committees. Before joining the Bank, he was a member of faculty at LSE and was Managing Editor of the Review of Economic Studies; he has also worked at HM Treasury. He was President of the Royal Economic Society from 2013 to 2015 and was knighted in 2014 for services to monetary policy and central banking. He holds a PhD from MIT. Christian Broda is a Managing Director at Duquesne Capital Management. Prior to joining Duquesne, he was Professor of Economics at the University of Chicago. He has published numerous articles in leading economic journals and books on international finance and trade. He has also held positions at Lehman Brothers, as Chief International Economist; at Barclays Capital, as Head of International Research; at Columbia University; and at the Federal Reserve Bank of New York. He is an associate editor of the Journal of Development Economics, a faculty fellow of the National Bureau of Economic Research, and a co-editor of the IMF Economic Review. He received his PhD from MIT. Takatoshi Ito is a Professor in the School of International and Public Affairs, Columbia University and Associate Director of Research at the Center on Japanese Economy and Business. He has also held academic positions at the Universities of Minnesota, Hitotsubashi and Tokyo. He has also served in the public sector, including as a Senior Advisor at the IMF; as Deputy Vice-Minister for International Affairs at the Ministry of Finance (1999-2001); and on the Prime Minister’s Council on Economic and Fiscal Policy (2006-8). He is the author of several books on the Japanese economy and of more than 130 academic articles. He was President of the Japanese Economic Association in 2004 and was awarded the National Medal with Purple Ribbon in 2011 for academic achievement. He holds a PhD from Harvard University. Randall S. Kroszner is the Norman R. Bobins Professor of Economics at the University of Chicago’s Booth School of Business. From 2006 to 2009, he served as a Governor of the US Federal Reserve System, chairing the Fed’s committees on Supervision and Regulation and on Consumer and Community Affairs. From 2001 to 2003, he was a member of the US President’s Council of Economic Advisers. He has more than 100 publications to his name, including a recent book co-authored with Robert J. Shiller, Reforming US Financial Markets: Reflections Before and Beyond Dodd-Frank. He received his PhD from Harvard University. v Acknowledgements The authors are most grateful for the many insightful comments received from the discussants and participants at the conference to discuss the first draft of this report. vi Contents About the Authors v Acknowledgements vi List of Conference Participants ix Foreword xv Executive summary 1 1 Introduction 3 1.1 Some key facts 4 1.2 Historical context 9 1.3 Summary 13 Chapter 1 Annex: Expected inflation and the UK real consol yield 14 2 Why have (safe) real interest rates fallen? 17 2.1 A higher propensity to save 24 2.2 A lower propensity to invest 34 2.3 Risky versus safe assets and portfolio shifts 37 2.4 Summing up 44 3 Lessons from Japan 47 3.1 A brief chronology 47 3.2 From disinflation to deflation 51 3.3 Escaping the deflationary trap 54 3.4 Effects of low interest rates on the private sector 61 3.5 Demography 62 4 Policies and prospects 65 4.1 Monetary policy 65 4.2 Financial markets and financial stability 71 4.3 Prospects 78 4.4 Concluding remarks 84 Discussions 85 References 103 List of Conference Participants Ivan Adamovich Member of the Executive Board Notenstein Private Bank Ltd, Zürich Philip Adler Head of Capital Markets Crédit Agricole (Suisse) SA, Geneva Edmond Alphandéry Chairman Centre For European Policy Studies, Paris Katrin Assenmacher Head of Monetary Policy Analysis Swiss National Bank, Zürich Simone Auer Economist Swiss National Bank, Zürich Richard Baldwin Professor of International Economics The Graduate Institute, Geneva Director CEPR, London Vít Bárta Advisor to Governor Czech National Bank, Prague Sir Charles Bean Professor London School of Economics Agnès Bénassy-Quéré Professor Paris School of Economics French Council of Economic Analysis, Paris Mickael Benhaim Co-Head of Global Bonds Fixed Income Pictet Asset Management, Geneva Jan Marc Berk Director and Research Division De Nederlandsche Bank NV Rémy Bersier Member of the Executive Board Banque Julius Baer & Co. Ltd, Geneva Robert Bichsel Head of Banking System Financial Stability Swiss National Bank, Bern x Low for Long? Causes and Consequences of Persistently Low Interest Rates Laurence Boone Counsellor at the Presidency of the French Republic International and European Economic and Financial Affairs Sherpa, Paris Claudio Borio Head of the Monetary and Economic Department Bank for International Settlements (BIS), Basel Christian Broda Managing Director Duquesne Family Office, New York Luigi Buttiglione Head of Global Strategy Brevan Howard Investment Products, Geneva Olli Castren Economist Strategy - Research Brevan Howard Investment Products, Geneva Benoît Coeuré Member of the Executive Board European Central Bank, Frankfurt Philippe Communod Head of Treasury Crédit Agricole (Suisse) SA, Geneva Steve Donzé Macroeconomist Pictet Asset Management SA, Geneva Jean-Marc Falter Advisor Swiss National Bank, Geneva Gene Frieda Global Strategist Moore Capital, London Patrice Gautry Chief Economist UBP, Geneva Gaston Gelos Division Chief Global Financial Stability Analysis IMF, Washington, DC Hans Genberg Adviser The SEACEN Centre, Kuala Lumpur Stefan Gerlach Deputy Governor Central Bank of Ireland, Dublin Michel Girardin Professor of Macrofinance Geneva School of Economics and Management University of Geneva List of Conference Participants xi Charles Goodhart Professor Emeritus of Banking and Finance London School of Economics Christos Gortsos Secretary General Hellenic Bank Association, Athens Niels Lynggård Hansen Director and Head of Economics
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