Low rates and bank stability: the risk of a tipping point

Policy rates in advanced economies are unusually low. What effect does this have on bank stability? I identify two competing effects. On the one hand, low rates harm bank profits by squeezing interest margins. On the other hand, they boost the value of long-term assets held by banks. Using a standard banking model, I determine the policy rate level at which these two forces cancel each other out, i.e. the tipping point. Past this tipping point, the net effect of low rates on bank capital is negative.

Ageing and the real interest rate in Japan

The Japanese economy has experienced a prolonged slowdown in growth and persistent declines in the real interest rate, while at the same time the country’s labour force has been rapidly ageing. This column explores a novel causal link between the ageing labour force and the low-frequency declining trend in the real interest rate since the 1970s, and suggests that the ageing of the labour force accounts for 40% or more of the declines in the real interest rate observed between the 1980s and 2000s in Japan.

ECB monetary policy and catch-up inflation

In July, the ECB issued its first Strategic Review since 2003. The latest CfM-CEPR survey investigates one component of the announced policy shift: the new definition of price stability. Most members of the panel of experts on the European economy support the ECB explicitly allowing inflation to exceed its target for extended periods to make up for below-target inflation in the past. This 60% majority has divided views on the optimal alternative policies, with the largest share supporting average inflation targeting and some members supporting nominal GDP targeting or hybrid policies.

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