The Long Term Consequences of Low Interest Rates

Central banks have employed unprecedented expansionary monetary policy, keeping interest rates at near-zero levels for an extended period of time since the crisis of 2007-08. Quantitative easing interventions have been employed in addition to affect asset prices directly, most notably in government bond and mortgage markets, to keep sovereign and mortgage borrowing costs low. These interventions may have the beneficial aspect of generating wealth transfers to borrowers, notably banks and households with negative home equities, they may also be stoking asset-price inflation, often in unexpected fashion, by inducing a "search for yield" among savers and intermediaries who manage their savings. These intermediaries include not just banks, but also money market funds, pension funds, insurance companies, hedge funds, real estate investment trusts, among others, which together comprise "shadow banking", an important part of the financial sector that is not regulated as banks but performs similar economic functions and is often inter-connected with banks.

The June Forum brought  together academics, policy-makers and practitioners to discuss existing theory and empirical evidence on the implications of an extended  phase of monetary policy operating at the "zero lower bound", as well as the emerging trends in investment strategies of financial intermediaries as a response to such monetary policy. It discussed whether and how the regulatory toolkit of macro-prudential policies, currently aimed at banks, should expand its perimeter to shadow banking, to contain the emerging sources of financial fragility, as - and possibly even before - the central banks exit from the expansionary monetary policies and asset prices experience interest-rate corrections. Giovanni Dell'Ariccia from the IMF, José-Luis Peydró from Universitat Pompeu Fabra and Philip Turner from the Bank for International Settlements spoke. A panel discussion, chaired by Viral Acharya, followed.

[Click here to go to CEPR's policy portal VoxEU for a narrative and video summary of the day's discussion and conclusions]