Advertisement

Comparative Economic Studies

, Volume 56, Issue 2, pp 313–334 | Cite as

The Low-Interest-Rate Environment, Global Liquidity Spillovers and Challenges for Monetary Policy Ahead

  • Ansgar Belke
  • Florian Verheyen
Symposium Article
First Online:

Abstract

The impact of global banking on financial stability and the connected post-crisis challenges have been under-researched before the crisis. We interpret ‘global banking’ as ‘global central banking’, focus on the role of international monetary policies and global liquidity for financial stability and identify imponderables emerging in this context. Central banks continue to stress that they will keep interest rates low for a prolonged period, in spite of negative side effects such as deferred bank balance sheet repair. We show that it is crucial to cope with these challenges to return to and ensure global financial stability in the future.

Keywords

global liquidity central banks and their policies financial repression financial stability low interest rates 

JEL Classifications

E58 F33 G22 G23 
This is a preview of subscription content, log in to check access.

Notes

Acknowledgements

This paper is based on an internal briefing paper prepared by the author for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, February 2013, in Brussels. The authors are grateful for valuable comments received from Paul Wachtel and other participants at the 2012 Symposium ‘Global Banking, Financial Stability, and Post-Crisis Policy Challenges’ in Maastricht, NL.

References

  1. Albertazzi, U and Gambacorta, L . 2009: Bank profitability and the business cycle. Journal of Financial Stability 5 (4): 393–409.CrossRefGoogle Scholar
  2. Albertazzi, U and Marchetti, D . 2010: Credit supply, flight to quality and evergreening: an analysis of bank-firm relationships after Lehman. Bank of Italy, Temi di Discussione (Working Papers), No. 756, April.Google Scholar
  3. Altunbas, Y, Gambacorta, L and Marqués, D . 2012: Do bank characteristics influence the effect of monetary policy on bank risk? Economic Letters 117 (1): 220–222.CrossRefGoogle Scholar
  4. Angeloni, I, Faia, E and Winkler, R . 2010: Exit strategies. CFS Working Paper no. 2010/25.Google Scholar
  5. Bank for International Settlements. 2011: 81st Annual Report, Basle, June.Google Scholar
  6. Bank for International Settlements. 2012: 82nd Annual Report, Basle, June.Google Scholar
  7. Belke, A . 2012a: ECB and Fed crisis policies at the zero-lower-bound – An empirical assessment based on modified reaction functions. Briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, July, Brussels.Google Scholar
  8. Belke, A . 2012b: A more effective eurozone monetary policy tool – Gold-backed sovereign debt. Briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, September, Brussels.Google Scholar
  9. Belke, A . 2012c: 3-year LTROs – A first assessment of a non-standard policy measure. Briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, March, Brussels.Google Scholar
  10. Belke, A . 2013a: Exit strategies and their impact on the euro area – A model based view. Briefing paper prepared for presentation at the Committee on Economic and Monetary Affairs of the European Parliament for the quarterly dialogue with the President of the European Central Bank, December, Brussels.Google Scholar
  11. Belke, A . 2013b: The eurozone crisis – a tale of north and south. The Statesman’s Yearbook. Palgrave Macmillan: Houndmills, Basingstoke.Google Scholar
  12. Belke, A and Gros, D . 2005: Asymmetries in trans-atlantic monetary policy making: does the ECB follow the Fed? Journal of Common Market Studies 43 (5): 921–946.CrossRefGoogle Scholar
  13. Belke, A and Polleit, T . 2010a: How much fiscal backing must the ECB have? The euro area is not the Philippines. Économie Internationale 124 (4): 5–30.Google Scholar
  14. Belke, A and Polleit, T . 2010b: Monetary economics in globalised financial markets. Springer: Berlin.Google Scholar
  15. Belke, A, Bordon, I and Hendricks, T . 2010: Global liquidity and commodity prices – A cointegrated VAR approach for OECD countries. Applied Financial Economics 20 (3): 227–242.CrossRefGoogle Scholar
  16. Belke, A, Bordon, I and Volz, U . 2013: Effects of global liquidity on commodity and food prices. World Development 44 (April): 31–43.CrossRefGoogle Scholar
  17. Belke, A, Beckmann, J and Czudaj, R . 2014: The importance of global shocks for national policymakers – Rising challenges for sustainable monetary policies, The World Economy, forthcoming, doi: 10.1111/twec.12127.Google Scholar
  18. Belke, A, Herz, B and Vogel, L . 2006: Reforms, exchange rates and monetary commitment: A panel analysis for OECD countries. Open Economies Review 18 (3): 369–388.CrossRefGoogle Scholar
  19. Belke, A, Orth, W and Setzer, R . 2010: Liquidity and the dynamic pattern of asset price adjustment: A global view. Journal of Banking and Finance 34 (8): 1933–1945.CrossRefGoogle Scholar
  20. Belke, A, Freytag, A, Keil, J and Schneider, F . 2012: The credibility of monetary policy announcements: Empirical evidence for OECD countries since the 1960s. DIW Discussion Paper No. 1225/2012, Deutsches Institut für Wirtschaftsforschung, Berlin.Google Scholar
  21. Belke, A, Koesters, W, Leschke, M and Polleit, T . 2002: International coordination of monetary policy, ECB Observer – Analyses of the Monetary Policy of the European System of Central Banks, No. 4, Frankfurt/Main, 19 December.Google Scholar
  22. Bernanke, BS . 21 November 2002: Deflation: making sure ‘it’ doesn’t happen here. Remarks by the Governor before the national economists club, Washington, DC, http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm, accessed 1 March 2014.
  23. Braunberger, G . 2013: Die Zinsen steigen, http://www.faz.net/aktuell/finanzen/fonds-mehr/staatsanleihen-die-zinsen-steigen-12561500.html, accessed 1 March 2014.
  24. Borio, C . 2011: Central banking post-crisis: what compass for uncharted waters? BIS Working Papers, No. 353, Basle.Google Scholar
  25. Bruno, V and Shin, HS . 2012: Capital flows and the risk-taking channel of monetary policy. Paper presented at the 11th BIS Annual Conference, Basle.Google Scholar
  26. Brunnermeier, MK and Pedersen, LH . 2009: Market liquidity and funding liquidity. The Review of Financial Studies 22 (6): 2201–2238.CrossRefGoogle Scholar
  27. Bundesbank. 2012: Monthly Bulletin, Frankfurt/Main, November.Google Scholar
  28. Bundesbank. 2014: Private debt – status quo, need for adjustment and policy implications. Monthly Bulletin, Frankfurt/Main, pp. 53–65, January.Google Scholar
  29. Burda, M and Wyplosz, C . 2012: Macroeconomics – a European text, 6th Edition. Oxford University Press: Oxford.Google Scholar
  30. Caballero, R, Hoshi, T and Kashyap, A . 2008: Zombie lending and depressed restructuring in Japan. American Economic Review 98 (5): 1943–1977.CrossRefGoogle Scholar
  31. Danske Bank. 2013: Negative deposit rates: the Danish experience, http://danskeanalyse.danskebank.dk/abo/NegativeratesinDKNovember2013/$file/Negative_rates_in_DK_November_2013.pdf, accessed 1 March 2014.
  32. European Central Bank. 2012: Global liquidity: concepts, measures and implications from a monetary policy perspective. Monthly Bulletin, October, Frankfurt/Main: European Central Bank, pp. 55–68.Google Scholar
  33. European Central Bank. 2013a: Introductory statement to the press conference, Frankfurt/Main, 4 July, http://www.ecb.europa.eu/press/pressconf/2013/html/is130704.en.html, accessed 1 March 2014.
  34. European Central Bank. 2013b: Financial Stability Review, Frankfurt/Main, November.Google Scholar
  35. Frankel, J . 2012: The death of inflation targeting. ProjectSyndicate, 16 May.Google Scholar
  36. Frankfurter Allgemeine Zeitung. 2012: Bundesbankpräsident Weidmann ‘Die Ursachen der Krise sind noch lange nicht beseitigt’, 29 December.Google Scholar
  37. Fuhrer, J and Madigan, BF . 1997: Monetary policy when interest rates are bounded at zero. The Review of Economics and Statistics 74 (4): 573–585.CrossRefGoogle Scholar
  38. Fuhrer, J and Sniderman, M . 2000, November: Monetary policy in a low-inflation environment: conference summary. in: Fuhrer, J and Schneiderman, M (eds). Monetary policy in a low-inflation environment. Journal of Money, Credit and Banking 32(4): 845–869.Google Scholar
  39. Gray, C . 2012: Responding to a monetary superpower – Investigating the behavioral spillovers of US monetary policy. Atlantic Economic Journal 41 (2): 173–184.CrossRefGoogle Scholar
  40. Gros, D . 2013: Emerging markets’ Euro nemesis, CEPS Commentaries, Centre for European Policy Studies (CEPS), Brussels, 9 September.Google Scholar
  41. Gros, D, Alcidi, C and Giovanni, A . 2012: Central banks in times of crisis: The FED vs. the ECB. CEPS Policy Brief No. 276.Google Scholar
  42. Hofmann, B and Bogdanova, B . 2012: Taylor rules and monetary policy: A global great deviation? BIS Quarterly Review (September).Google Scholar
  43. International Monetary Fund (IMF). 2012: Restoring confidence and progressing on reforms. Global Financial Stability Report, World Economic and Financial Surveys, Washington/DC, October.Google Scholar
  44. International Monetary Fund (IMF). 2013a: IMF multilateral issues report – Spillover report. International Monetary Fund: Washington/DC, August.Google Scholar
  45. International Monetary Fund (IMF). 2013b: Global Financial Stability Report: Old risks – new challenges, Chapter 3: Do central bank policies since the crisis carry risks to financial stability? Washington/DC, April.Google Scholar
  46. Johnson, K, Small, D and Tyron, R . 1999: Monetary policy and price stability. International Economics and Finance Discussion Paper, 641, Board of Governors of the Federal Reserve System: Washington, DC.Google Scholar
  47. Kim, S . 2000: International transmission of US monetary policy shocks: Evidence from VARs. Journal of Monetary Economics 48 (2): 339–372.CrossRefGoogle Scholar
  48. Landau, JP . 2013: Global liquidity: Public and private. Economic Symposium on ‘Global dimensions of unconventional monetary policy’, Jackson Hole, Wyoming, 22–24 August.Google Scholar
  50. Maddaloni, A and Peydró, J-L . 2011: Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the euro-area and the US lending standards. Review of Financial Studies 24 (6): 2121–2165.CrossRefGoogle Scholar
  51. Mayer, T . 2014: Larry Summers’ interest rate conundrum, CEPS High Level Brief, Centre for European Policy Studies, Brussels, 16 January.Google Scholar
  52. Mersch, Y . 2014: Reviving growth in the euro area, Speech at the Institute of International European Affairs, Dublin, 7 February, https://www.bis.org/review/r140211a.htm?ql=1, accessed 1 March 2014.
  53. Orphanides, A and Wieland, V . 1998, August: Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero. Finance and Economics Discussion Series, 1998–35, Board of Governors of the Federal Reserve System: Washington, DC.Google Scholar
  54. Peek, J and Rosengren, ES . 2003: Unnatural selection: Perverse incentives and the misallocation of credit in Japan. NBER Working Paper 9643, National Bureau of Economic Research: Cambridge, MA.Google Scholar
  55. Reifschneider, D and Williams, JC . 1999, September: Three lessons for monetary policy in a low inflation era. Board of Governors of the Federal Reserve System, Working Paper, Board of Governors of the Federal Reserve System: Washington, DC.Google Scholar
  56. Reinhart, C-M . 2012: The return of financial repression. CEPR Discussion Papers Series, 8947, London.Google Scholar
  57. Reinhart, CM and Sbrancia, MB . 2011: The liquidation of government debt. NBER Working Paper Series 16893: Cambridge, MA.Google Scholar
  58. Sargent, TJ and Wallace, N . 1981: Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5 (Fall): 1–17.Google Scholar
  59. Stella, P . 2010: Minimising monetary policy. BIS Working Papers, No. 330, Bank for International Settlements, Basle, November.Google Scholar
  60. Svensson, LEO . 2003: Escaping from a liquidity trap and deflation: The foolproof way and others. NBER Working Paper No. 10195: Cambridge, MA.Google Scholar
  61. Taylor, JB . 2013: International monetary coordination and the great deviation. Paper presented at the Session on International Policy Coordination, American Economic Association Annual Meetings, San Diego, CA, January.Google Scholar
  62. Tetlow, R and Williams, JC . 1998, March: Implementing price stability: Bands, boundaries and inflation targeting. Federal Reserve Board Staff Working Paper.Google Scholar
  63. The Economist. 2012: The side-effects of low interest rates, 30 June.Google Scholar
  64. Wolf, M . 2014: Davos thoughts: secular stagnation. Financial Times, 24 January.Google Scholar
  65. Woodford, M . 2008: Forward guidance for monetary policy: Is it still possible? VoxEU, 17 January, http://www.voxeu.org/article/forward-guidance-monetary-policy-it-still-possible, accessed 1 March 2014.

Copyright information

© Association for Comparative Economics 2014

Authors and Affiliations

  • Ansgar Belke
    • 1
    • 2
    • 3
  • Florian Verheyen
    • 1
  1. 1.University of Duisburg-Essen, Lehrstuhl für Volkswirtschaftslehre, insbes. MakroökonomikEssenGermany
  2. 2.Policy Department A: Economic and Scientific PolicyEuropean ParliamentBrussels
  3. 3.IZA Bonn, Schaumburg-Lippe-StrasseBonnGermany

Personalised recommendations