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Discussion Paper
Why Are Interest Rates So Low?
In a recent series of blog posts, the former Chairman of the Federal Reserve System, Ben Bernanke, has asked the question: 'Why are interest rates so low?' (See part 1, part 2, and part 3.) He refers, of course, to the fact that the U.S. government is able to borrow at an annualized rate of around 2 percent for ten years, or around 3 percent for thirty years. If you expect that inflation is going to be on average 2 percent over the next ten or thirty years, this implies that the U.S. government can borrow at real rates of interest between 0 and 1 percent at the ten- and thirty-year ...
Discussion Paper
Low Interest Rates and Bank Profits
The Fed’s December 2015 decision to raise interest rates after an unprecedented seven-year stasis offers a chance to assess the link between interest rates and bank profitability. A key determinant of a bank’s profitability is its net interest margin (NIM)—the gap between an institution’s interest income and interest expense, typically normalized by the average size of its interest-earning assets. The aggregate NIM for the largest U.S. banks reached historic lows in the fourth quarter of 2015, coinciding with the “low for long” interest rate environment in place since the ...
Working Paper
Low Interest Rates, Policy, and the Predictive Content of the Yield Curve
Does the yield curve’s ability to predict future output and recessions differ when interest rates are low, as in the current global environment? In this paper we build on recent econometric work by Shi, Phillips, and Hurn that detects changes in the causal impact of the yield curve and relate that to the level of interest rates. We explore the issue using historical data going back to the 19th century for the United States and more recent data for the United Kingdom, Germany, and Japan. This paper is similar in spirit to Ramey and Zubairy (2018), who look at the government spending ...
Speech
Financial Stability and Monetary Policy in a Low-Interest-Rate Environment
I thank Kasper Roszbach and the Norges Bank for inviting me to present at this workshop on low-interest-rate and unconventional monetary policy. I applaud the Norges Bank for spurring research on this topic. In a period of less than two decades, the world has experienced two historically deep negative shocks to the global economy and financial system. While their causes were different, the global financial crisis of 2008 and the COVID-19 pandemic crisis each necessitated the intervention of central banks in ways not contemplated in earlier decades. Lessons from the actions taken during the ...
Working Paper
Low Interest Rates and the Predictive Content of the Yield Curve
Does the yield curve's ability to predict future output and recessions differ when interest rates and inflation are low, as in the current global environment? We explore the issue using historical data going back to the 19th century for the US. This paper is similar in spirit to Ramey and Zubairy (2018), who look at the government spending multiplier in times of low interest rates. If anything, the yield curve tends to predict output growth better in low interest rate environments, though this result is stronger for RGDP than for IP.
Report
The Great Leverage 2.0? A Tale of Different Indicators of Corporate Leverage
Many policymakers have expressed concerns about the rise in nonfinancial corporate leverage and the risks this poses to financial stability, since (1) high leverage raises the odds of firms becoming a source of adverse shocks, and (2) high leverage amplifies the role of firms in propagating other adverse shocks. This policy brief examines alternative indicators of leverage, focusing especially on the somewhat disparate signals they send regarding the current state of indebtedness of nonfinancial corporate businesses. Even though the aggregate nonfinancial corporate debt-to-income ratio is at ...