Olivier Blanchard explains how for the last 30 years macroeconomic research has focused on one distortion ie nominal rigidities and one instrument,the nominal policy rate. He advocates the introduction, even into the simplest models, of more distortions such as finite horizons and the role of own funds in spending decisions. This richer approach will in turn modify the way macroeconomists should think about policy responses.
Distortions in Macroeconomics
By: Olivier Blanchard – Peterson InstituteIn this paper, Hansen and Sargent examine whether responses to modest amounts of model ambiguity can substitute for the implausibly large risk aversions seemingly required to explain observed market prices of risk.
“[…] the tools developed here could shed light on a recent public debate between two groups of macroeconomists, one prophesying secular stagnation because of technology growth slowdowns, the other dismissing those pessimistic forecasts. The tools that we describe can be used, first, to quantify how challenging it is to infer persistent changes in growth rates, and, second, to guide macroeconomic policy design in light of available empirical evidence.”
Prices of Macroeconomic Uncertainties with Tenuous Beliefs
Authors:Lars Peter Hansen, Thomas J.Sargent
From: University of Chicago – New York University
Brunnermeier and Koby, in this paper, show that there is a “reversal interest rate” below which a central bank prompts lenders to cut back on their lending, instead of increasing it. This threshold actually sets a limit to how long central banks should keep interest rates low.
“Lower interest rates seem to damage net interest margins and bank lending.”
The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy
Authors: Markus K. Brunnermeier, Yann Koby
From: Princeton University
Coimbra and Rey, in this paper, show that differences in the risk attitude of financial intermediaries are important for the transmission of shocks and when interest rates are low further monetary stimulus can increase the aggregate level of risk-taking in the economy.
“As can be seen in the middle and right panels, there is a very significant heterogeneity within the financial sector in terms of time variation of leverage and its correlation with the interest rate.”
Financial Cycles with Heterogeneous Intermediaries
Authors: Nuno Coimbra, Hélène Rey
From: Paris School of Economics – London Business School
Bonfiglioli and Gancia use an exhaustive cross-country panel data set on reforms in six major areas to show that economic uncertainty has a positive and significant effect on the adoption of structural reforms.
Economic Uncertainty and Structural Reforms
Authors: Alessandra Bonfiglioli, Gino Gancia
From: Universitat Pompeu Fabra-CREI
Since the beginning of 2017 high political uncertainty in the US has coexisted with very low stock volatility. Should we be puzzled? Not really argue Pastor and Veronesi because the positive relation between political uncertainty and volatility implies a strong and constant “political signal”. The new administration’s political signals have been full of reversals and contradictions and therefore difficult for investors to interpret. As market participants become skeptical about announced future policy actions the link between stock volatility and political uncertainty weakens.
Explaining the puzzle of high policy uncertainty and low market volatility
By: Lubos Pastor, Pietro Veronesi – University of Chicago
Negative rates and higher inflation targets can be considered as alternative methods for pushing the real interest rate further below zero. Bernanke compares the two options on four criteria: ease of implementation, costs and side effects, distributional effects, and political risks. He concludes that it is not clear why a higher inflation target would be a preferable to negative rates.
Modifying the Fed’s policy framework: Does a higher inflation target beat negative interest rates?
By: Ben Bernanke – BrookingsKiley and Roberts argue that economic conditions have changed, more specifically the decrease of the equilibrium interest rate could force the Fed to be at the zero lower bound about 30 percent to 40 percent of the time.
Monetary policy in a low interest rate world
Authors:Michael T. Kiley, John M. Roberts
From: Federal Reserve Board – BrookingsStructural reforms are implemented during deep recessions and when unemployment is high conclude Dias da Silva and al. in this paper. They add that, contrary to common belief, low interest rates tend to promote structural reforms rather than discourage them.
When do countries implement structural reforms?
Authors: Antonio Dias Da Silva, Audrey Givone, David Sondermann
From: ECB
