scholarly journals Are Low Interest Rates Deflationary? A Paradox of Perfect-Foresight Analysis

2019 ◽  
Vol 109 (1) ◽  
pp. 86-120 ◽  
Author(s):  
Mariana García-Schmidt ◽  
Michael Woodford
Keyword(s):  
Interest Rates ◽  
Cognitive Process ◽  
Reflective Equilibrium ◽  
Equilibrium Analysis ◽  
Perfect Foresight ◽  
Reasonable Approximation ◽  
Forward Guidance ◽  
Low Interest Rates ◽  
Endogenous Variables ◽  
Long Time

We argue that an influential neo-Fisherian analysis of the effects of low interest rates depends on using perfect-foresight equilibrium analysis under circumstances where it is not plausible for people to hold expectations of that kind. We propose an explicit cognitive process by which agents may form their expectations of future endogenous variables. Perfect foresight is justified by our analysis as a reasonable approximation in some cases, but in the case of a commitment to maintain a low nominal interest rate for a long time, our reflective equilibrium implies neither neo-Fisherian conclusions nor implausibly strong predicted effects of forward guidance. (JEL D84, E12, E31, E43, E52)

Low interest rates may be the new normal

2018 ◽  
Keyword(s):  
Interest Rates ◽  
Trade Deficit ◽  
Content Type ◽  
Fiscal Effort ◽  
Asset Bubbles ◽  
Forward Guidance ◽  
Downward Pressure ◽  
The Us ◽  
Low Interest Rates ◽  
New Research

Subject Modelling lower rates for longer. Significance The ‘secular stagnation' thesis argues that as population growth slows, the need of businesses to invest in plant and equipment slows and the supply of funds from households grows as they save more, putting downward pressure on interest rates. New research attempts to quantify this hypothesis and to show what it would take to go back to 'normal'. Impacts 'Forward guidance' will be of little use if there is a recession as there would be no reason to expect an increase in policy rates. Asset bubbles would likely be a feature of any sustained non-fiscal effort to engineer a deeply negative real interest rate. The US trade deficit, usually a welcome source of lower rates, will in this context exacerbate the zero-lower-bound issue in a recession.

DO BANKS TAKE UNUSUAL RISKS WHEN INTEREST RATES ARE EXPECTED TO STAY LOW FOR A LONG TIME?

2017 ◽  
Vol 23 (06) ◽  
pp. 2409-2433
Author(s):  
Paul Gaggl ◽  
Maria Teresa Valderrama
Keyword(s):  
Financial Crisis ◽  
Interest Rates ◽  
Risk Taking ◽  
Bank Risk ◽  
Short Term ◽  
European Central ◽  
Loan Portfolios ◽  
Low Interest Rates ◽  
Long Time

The financial woes that initiated the financial crisis of 2007/08 have, at least in part, been traced to excessive bank risk-taking. What induced this behavior? One explanation is the persistently low short-term interest rates during the mid-2000s. We exploit an extensive panel of matched Austrian banks and firms during 2000–2008 to investigate the effects of the European Central Bank's (ECB) policy of persistently low interest rates during 2003q3–2005q3. Our analysis suggests that this policy likely caused Austrian banks to hold risker loan portfolios than they would have in its absence.

Remaking Retirement

2020 ◽  
Keyword(s):  
Interest Rates ◽  
Older Workers ◽  
Older Persons ◽  
The United States ◽  
Older Population ◽  
The Past ◽  
Cost Of Education ◽  
The World ◽  
Low Interest Rates ◽  
Key Aspects

Around the world, people nearing and entering retirement are holding ever-greater levels of debt than in the past. This is not a benign situation, as many pre-retirees and retirees are stressed about their indebtedness. Moreover, this growth in debt among the older population may render retirees vulnerable to financial shocks, medical care bills, and changes in interest rates. Contributors to this volume explore key aspects of the rise in debt across older cohorts, drill down into the types of debt and reasons for debt incurred by the older population, and review policies to remedy some of the financial problems facing older persons, in the United States and elsewhere. The authors explore which groups are most affected by debt, and they also identify the factors causing this important increase in leverage at older ages. It is clear that the economic and market environments are influential when it comes to saving and debt. Access to easy borrowing, low interest rates, and the rising cost of education have had important impacts on how much people borrow, and how much debt they carry at older ages. In this environment, the capacity to manage debt is ever more important as older workers lack the opportunity to recover for mistakes.

scholarly journals Special Issue “Interplay between Financial and Actuarial Mathematics”

Risks ◽  
2021 ◽  
Vol 9 (8) ◽  
pp. 139
Author(s):  
Corina Constantinescu ◽  
Julia Eisenberg
Keyword(s):  
Machine Learning ◽  
Control Theory ◽  
Option Pricing ◽  
Interest Rates ◽  
Financial Mathematics ◽  
Special Issue ◽  
Actuarial Mathematics ◽  
Mortality Models ◽  
Low Interest Rates

The Special Issue aims to highlight the interaction between actuarial and financial mathematics, which, due to the recent low interest rates and implications of COVID-19, requires an interlace between actuarial and financial methods, along with control theory, machine learning, mortality models, option pricing, hedging, unit-linked contracts and drawdown analysis, among others [...]

Counter-cyclical public venture capital: Debt-funding as an anti-austerity innovation strategy

2017 ◽  
Vol 56 (3) ◽  
pp. 477-495 ◽  
Author(s):  
Alex Etzkowitz ◽  
Henry Etzkowitz
Keyword(s):  
Venture Capital ◽  
Interest Rates ◽  
Innovation Strategy ◽  
Productive Capacity ◽  
Knowledge Based ◽  
Low Interest Rates ◽  
The Usa ◽  
The Business Cycle ◽  
Smart Specialization ◽  
Private Venture

This article outlines a counter-cyclical innovation strategy to achieve prosperity, derived from an innovative project, the California Institute for Regenerative Medicine (CIRM). We identify an ‘innovation paradox’ in that the very point in the business cycle, when legislators are tempted to view austerity as a cure for economic downturns and to reduce innovation spend, is when an increase is most needed to create new industries and jobs and innovate out of recession or depression. It is both desirable and possible that policymakers resist the urge to capitulate to the innovation paradox. During periods that exhibit subdued inflation, elevated spare productive capacity, and low government borrowing rates, governments should increase their borrowings and use the proceeds to boost investment targeted towards innovation. We show how the State of California successfully utilized debt financing, traditionally reserved for physical infrastructure projects, to stimulate the development of intellectual infrastructure. Finally, we recommend a halt to European austerity policies and a ‘triple helix’ broadening of narrow ‘smart specialization’ policies that chase a private venture capital chimera. Europe should seize the present macroeconomic opportunity of low interest rates, borrow for innovation and be paid back manifold by ‘picking winners’, similarly to what the USA has been doing through DARPA (Defense Advanced Research Projects Agency) with GPS, as a response to Sputnik, the Internet and artificial intelligence, or the driverless car, formerly known as the ‘autonomous land vehicle’ in its military guise. Proactively targeted macroscopic investments in innovation are needed to solve the productivity/employment puzzle and foster the transition to a knowledge-based society.

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