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11. U.S. Debt Sustainability under Low Interest Rates and after the Covid‐​19 Shock

Author:
William R Cline
Publication Date:
10-2021
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The worst pandemic in 100 years has hit the United States at a time when economic thinking has become more comfortable with high public debt, facilitating an aggressive response in public spending for relief that has reached a remarkable 27 percent of GDP.1 One reason for the receptiveness to large spending has been the perception that the fiscal stimulus in the Great Recession of 2007–2009 erred on the side of excessive caution and left an aftermath of unduly slow growth. More fundamentally, low real interest rates in recent years have shifted the center of gravity in macroeconomic analysis away from concern about chronic deficits and rising debt toward a certain benign neglect of debt as a problem.
Topic:
Debt, Interest Rates, Sustainability, and COVID-19
Political Geography:
North America and United States of America

12. U.S. Monetary Policy and the Decline in the Interest Rates (1990-2007)

Author:
Santiago Capraro, Carlo Panico, and Luis Daniel Torres-Gonzalez
Publication Date:
12-2021
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
Interest rates in the U.S. and in other countries have experienced persistent and generalised declines since the 1980s. The main interpretations of this phenomenon ignore the role of monetary factors, such as financial and monetary policy. The essay proposes an alternative interpretation based on the choice of the Federal Reserve (FED) to conduct monetary policy by attributing high priority to financial stability. The interaction between changes in financial regulation, the transformation of "specialized" into "universal” banking, and the concern with financial instability have led the central bank to add to the role of "lender of last resort" that of "lender of first resort," which systematically provides liquidity at a low cost to financial firms. This new conduct of monetary policy has produced the downward trend in interest rates.
Topic:
Monetary Policy, Federal Reserve, Economy, and Interest Rates
Political Geography:
United States of America

13. GARCH Analyses of Risk and Uncertainty in the Theories of the Interest Rate of Keynes and Kalecki

Author:
Hubert Gabrisch
Publication Date:
01-2021
Content Type:
Working Paper
Institution:
The Vienna Institute for International Economic Studies (WIIW)
Abstract:
This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes’s theory – the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete.
Topic:
Economics, International Political Economy, Economic Theory, Interest Rates, Macroeconomics, Keynes, Models, and Michał Kalecki
Political Geography:
Global Focus

14. Lessons from the Swedish Experience with Negative Central Bank Rates

Author:
Fredrik N. G. Anderson and Lars Jonung
Publication Date:
10-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Interest rates declined in the wake of the 2007–2009 global financial crisis. They remained low for most of the 2010s, only rising modestly toward the end of the decade. In some European countries, interest rates even became negative. While limited to a few countries initially, the likelihood of more central banks following suit is growing in the wake of the COVID-19 pandemic. Not least, the Federal Reserve System is under pressure to adopt a negative federal funds rate (Bernanke 2020; Lilley and Rogoff 2020).
Topic:
Monetary Policy, Interest Rates, and Central Bank
Political Geography:
Europe and Sweden

15. Perspectives on Balance Sheet and Credit Policies: A Tribute to Marvin Goodfriend

Author:
Esther L. George
Publication Date:
10-2020
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Iappreciate this opportunity to pay tribute to Marvin Goodfriend and his many contributions to the theory and practice of monetary policy. At the Kansas City Fed, we knew Marvin as a scholar and a good Federal Reserve colleague. Marvin also was a participant in a number of our Jackson Hole Economic Symposiums. As a Research Officer at the Richmond Fed, he attended the first symposium that we held in Jackson Hole, Wyoming, in 1982, where his work on “Discount Window Borrowing, Monetary Control, and the Post‐​October 6, 1979 Federal Reserve Operating Procedure” was widely cited.1 Thirty‐​four years later in 2016, as a professor at Carnegie Mellon, he presented a paper making the case for deeply negative interest rates as a policy tool that could breach the zero lower bound on nominal rates. He argued that “the zero interest bound encumbrance on monetary policy should be removed so that movements in the intertemporal terms of trade can be reflected fully in interest rate policy to sustain price stability and full employment with a minimum of inefficient and costly alternative policies” (Goodfriend 2016; 128; emphasis added).
Topic:
Monetary Policy, Finance, Interest Rates, and Credit
Political Geography:
Global Focus and United States of America

16. Trends in Private Capital Flows to Low-Income Countries: Good and Not-So-Good News

Author:
Nancy Lee and Asad Sami
Publication Date:
07-2019
Content Type:
Policy Brief
Institution:
Center for Global Development (CGD)
Abstract:
Interest in mobilizing private finance for SDG investments is surging in a world of stagnating aid, limited fiscal space, and rising LIC debt. But is more reliance on private finance realistic for LICs? This paper explores the performance since the global financial crisis of one source of private finance for LICs: cross-border private capital inflows. Much of the evidence is encouraging, and some of it flies in the face of conventional wisdom. For LICs, private capital inflows are an important and growing source of finance. For the median LIC, private capital inflows are now as large as ODA as a share of GDP. And the FDI component—most of LIC inflows—has been stable and resilient throughout the post-crisis period. Importantly, inflows are not all captured by resource-rich LICs. In 2017, more than half of capital inflows to LICs went to non-resource-rich LICs. Increasingly, policies, not just resource endowments, shape LIC destinations for foreign capital. The relation between median capital inflows/GDP and median regulatory quality is significantly positive for non-resource-rich LICs. And sources of FDI are diversifying. In 2016, China’s stock of FDI in Africa was almost as large as that of the traditional investors: the US, UK, and France. But there is also not-so-good news. Median private capital inflow/GDP ratios are not positively correlated with median private domestic investment/GDP in LICs. Nor is there a significant relationship with median public investment/GDP. The apparent lack of complementarity between foreign and domestic investment may point to problems related to investment enclaves and/or the role of the state in LIC economies. As in other countries, non-FDI inflows to LICs are volatile and sensitive to global commodity prices and interest rates. We find no relation between median country per capita income levels and private inflows/GDP, highlighting the need for caution in IDA graduation policies.
Topic:
Development, Capital Flows, Interest Rates, Private Sector, and Capital
Political Geography:
Global Focus

17. Domestic Cycles, Financial Cycles, and Policies. What Has Gone Wrong?

Author:
Daniel Daianu
Publication Date:
11-2017
Content Type:
Working Paper
Institution:
Center for Social and Economic Research - CASE
Abstract:
The financial crisis and its ensuing effects have brought back into the limelight the issue of cycles and of policies which fuel or mitigate crises. Cognitive and operational models in economics and business are questioned. There is a specter of much lower economic growth in the industrialized world. Central banks are over-burdened. This makes central bankers’ lives much more complicated and obfuscates the boundaries between monetary policy and fiscal policy, especially when financial stability gets to center stage. New systemic risks show up in capital markets. The eurozone has escaped collapse owing to the European Central Bank’s extraordinary operations and large macro-imbalance corrections in its periphery, but major threats persist. This paper focuses on economic cycles and policies in an international (European) context. Attention is paid to linkages between domestic cycles and the European financial cycle, drivers of financial cycles, finance deregulation and systemic risks, ultra-low interest rates, the international policy regime, and global stability. The experience of European emerging economies is taken into account.
Topic:
Debt, Monetary Policy, Financial Crisis, Economies, Economic Growth, Interest Rates, and Fiscal Policy
Political Geography:
Europe and European Union

18. Bond Yield Spillovers from Major Advanced Economies to Emerging Asia

Author:
Ansgar Belke, Irina Dubova, and Ulrich Volz
Publication Date:
03-2017
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper explores the extent to which changes to long-term interest rates in major advanced economies have influenced long-term government bond yields in Emerging Asia. To gauge long-term interest spillover effects, the paper uses VAR variance decompositions with high frequency data. Our results reveal that sovereign bond yields in Emerging Asia responded significantly to changes to US and Eurozone bond yields, although the magnitudes were heterogeneous across countries. The size of spillovers varied over time. The pattern of these variations can partially be explained by the implementation of different unconventional monetary policy measures in advanced countries.
Topic:
Economics, Emerging Markets, Monetary Policy, Interest Rates, and Bonds
Political Geography:
Asia

19. From Financial Repression to External Distress: The Case of Venezuela

Author:
Carmen M. Reinhart and Miguel Angel Santos
Publication Date:
04-2015
Content Type:
Working Paper
Institution:
The John F. Kennedy School of Government at Harvard University
Abstract:
Recent work has supported that there is a connection between domestic debt level and sovereign default on external debt. We examine the potential linkages in a case study of Venezuela from 1984 to 2013. This unique example encompasses multiple financial crises, cycles of liberalization and policy reversals, and alternative exchange rate arrangements. The Venezuelan experience reveals a nexus among domestic debt, financial repression, and external vulnerability. Unlike foreign currency-denominated debt, debt in domestic currency may be reduced through financial repression, a tax on bondholders and savers producing negative real interest rates. Using a variety of methodologies we estimate the magnitude of the tax from financial repression. On average, this financial repression tax (as a share of GDP) is similar to those of OECD economies, in spite of much higher domestic debt-to-GDP ratios in the latter. The financial repression "tax rate" is significantly higher in years of exchange controls and legislated interest rate ceilings. In line with earlier literature on capital controls, our comprehensive measures of capital flight document a link between domestic disequilibrium and a weakening of the net foreign asset position via private capital flight. We suggest these findings are not unique to the Venezuelan case.
Topic:
Debt, Finance, Capital Flows, Inflation, and Interest Rates
Political Geography:
South America and Venezuela

20. Are Low Interest Rates Deflationary? A Paradox of Perfect- Foresight Analysis

Author:
Mariana Garcia-Schmidt
Publication Date:
09-2015
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
A prolonged period of extremely low nominal interest rates has not resulted in high inflation. This has led to increased interest in the “Neo-Fisherian” proposition according to which low nominal interest rates may themselves cause inflation to be lower. The fact that standard models of the effects of monetary policy have the property that perfect foresight equilibria in which the nominal interest rate remains low forever necessarily involve low inflation (at least eventually) might seem to support such a view. Here, however, we argue that such a conclusion depends on a misunderstanding of the circumstances under which it makes sense to predict the effects of a monetary policy commitment by calculating the perfect foresight equilibrium consistent with the policy. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Under some circumstances, such as a commitment to follow a Taylor rule, a perfect foresight equilibrium (PFE) can arise as a limiting case of our more general concept of reflective equilibrium, when the process of reflection is pursued sufficiently far. But we show that an announced intention to fix the nominal interest rate for a long enough period of time creates a situation in which reflective equilibrium need not resemble any PFE. In our view, this makes PFE predictions not plausible outcomes in the case of policies of the latter sort. According to the alternative approach that we recommend, a commitment to maintain a low nominal interest rate for longer should always be expansionary and inflationary, rather than causing deflation; but the effects of such “forward guidance” are likely, in the case of a long- horizon commitment, to be much less expansionary or inflationary than the usual PFE analysis would imply.
Topic:
Economics, Monetary Policy, Inflation, and Interest Rates
Political Geography:
Global Focus