Empirical research suggests that lower interest rates induce banks to take higher risks. We assess analytically what this risk-taking channel implies for optimal monetary policy in a tractable New Keynesian model. We show that this channel creates a motive for the planner to stabilize the real rate. This objective conflicts with the standard inflation stabilization objective. Optimal policy thus tolerates more inflation volatility. An inertial Taylor-type reaction function becomes optimal. We then quantify the significance of the risk-taking channel for monetary policy in an estimated medium-scale extension of the model. Ignoring the channel when designing policy entails non-negligible welfare costs (0.7% lifetime consumption equivalent).
This paper assesses whether the global fall in inflation expectations together with increased fear of recession, the economic mechanism that drives asset prices in a model with consumption habits, help to explain the downward trajectory in nominal government bond yields and the stock price dynamics of six major economies from 1988 to 2019. We calibrate the habit model for each country separately. For most countries, focusing the calibrations on matching average ten-year bond yields allows one to generate artificial time series of bond yields and price-consumption ratios that follow the long-run time series patterns of their counterparts in the data.
This paper empirically examines the effect of population growth on long-term real interest rates. Although this effect is well founded in macroeconomic theory, the corresponding empirical results have been rather tenuous and surprisingly unstable. As the demographic interest rate impact is theoretically based on intergenerational relationships, we not only contemplate gross population growth rates but also distinguish between demographic growth resulting from a birth surplus and net migration. Within a panel covering 12 countries and the years since 1820, our results suggest that there is a positive, statistically significant, and stable effect from the birth surplus on real interest rates. Conversely, the corresponding effect of net migration seems to be much more volatile. Hence, our results suggest that it is mainly population growth occurring through a birth surplus that affects the equilibrium real interest rate.
