Must-Read: Charles Bean: Causes and Consequences of Persistently Low Interest Rates

Must-Read: So: On the one hand, risk tolerance is disappointingly and inappropriately low–but should return to normal some day. On the other hand, investors are “reaching for yield” and taking inappropriate risks by crowding into bubbly assets. I cannot be the only person who wants a real model of how this is supposed to work, and real evidence that it is a factor at work, plus a real argument that higher interest rates would exert enough of a curb to pass some reasonable benefit-cost test. The very sharp Gabriel Chodorow-Reich looked for this and did not find it…

Charles Bean: Causes and Consequences of Persistently Low Interest Rates: “Demographic developments… the partial integration of China…

…and the associated capital outflows…. a lower propensity to invest… as a result of heightened risk aversion…. Rates should eventually return to more normal levels…. But… the time scale… is highly uncertain and will be influenced by longer-term fiscal and structural policy choices…. A world of persistently low interest rates may be more prone to generating a leveraged ‘reach for yield’ by investors and speculative asset-price boom-busts. While prudential policies should be the first line of defence against such financial stability risks, their efficacy is by no means assured. In that case, monetary policy may need to come into play as a last line of defence…

October 25, 2015


Brad DeLong
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