Publication detail

Prolonged Period of Low Interest Rate Environment: Unintended Consequences

Author(s): Mgr. Josef Bajzík , Malovaná, Simona; Janků, Jan
Mgr. Dominika Ehrenbergerová (Kolcunová) , Malovaná, Simona; Janků, Jan
Type: Others
Year: 2020
Number: 0
Published in: CNB RPN 2/2020
Publishing place: Prague
Keywords: Financial vulnerabilities, low interest rates, monetary policy, natural rate, stability.
JEL codes: E52, E58, G2
Suggested Citation: Malovaná et al. (2020): Prolonged Period of Low Interest Rate Environment: Unintended Consequences, CNB RPN 2/2020
Abstract: We examine adverse effects of low interest rates environment on financial stability from multiple perspectives. At first, we provide a unique comparison of natural interest rates estimated using two approaches -- with and without financial factors -- for six large European countries inside and outside the euro area. Our estimation results show that the needs for monetary policy easing or tightening differ among individual economies and over time. Financial factors and macro-financial linkages further exaggerate these differences, implying that the business and financial cycles of these economies are not synchronized, with the financial cycle being more desynchronized.

Then, we provide a comprehensive review of existing empirical literature, allowing us to identify and categorize financial vulnerabilities which may be created and/or fueled by low interest rates. We argue that a prolonged period of low interest rates may lead to the point of no return by contributing to higher indebtedness, overvalued asset prices and undervalued risks, resource and credit misallocation and lower productivity. With the matter discussed, we offer a few monetary policy considerations including a short discussion on the role of macroprudential policy.

In brief, we suggest that (i) monetary policy should act symmetrically over the medium to long term, (ii) both short-term and long-term costs and benefits of pursuing accommodative or restrictive monetary policy should be accounted for, and (iii) global central banks should take into account their impact on countries both inside and outside their monetary unions. We further acknowledge that a coordination of monetary and macroprudential policies is needed and the interactions of both should be accounted for in order to find the best policy mix for the economy.
August 2022




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