Public Debt and Low Interest Rates

By Olivier Blanchard

American Economic Review, April 2019

This lecture focuses on the costs of public debt when safe interest rates are low. I develop four main arguments. First, I show that the current US situation, in which safe interest rates are expected to remain below growth rates for a long time, is mor...

Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?

[Symposium: Fiscal Policy]

By Valerie A. Ramey

Journal of Economic Perspectives, Spring 2019

This paper takes stock of what we have learned from the "Renaissance" in fiscal research in the ten years since the financial crisis. I first discuss the new innovations in methodology and various strengths and weaknesses of the main approaches to estimat...

Monetary Policy Strategies for a Low-Rate Environment

By Ben S. Bernanke, Michael T. Kiley, and John M. Roberts

AEA Papers and Proceedings, May 2019

In low-rate environments, policy strategies that involve holding rates "lower for longer" (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public's expectations, which is not always ...

Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

By Thomas M. Mertens and John C. Williams

AEA Papers and Proceedings, May 2019

This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inf...

Policy Options at the Zero Lower Bound When Foresight is Limited

By Michael Woodford and Yinxi Xie

AEA Papers and Proceedings, May 2019

We reconsider several monetary and fiscal policies that have been proposed as tools of stabilization policy when conventional interest-rate policy is constrained by the zero lower bound on interest rates, assuming that households and firms are capable of ...

Monetary Policy and the Redistribution Channel

By Adrien Auclert

American Economic Review, June 2019

This paper evaluates the role of redistribution in the transmission mechanism of monetary policy to consumption. Three channels affect aggregate spending when winners and losers have different marginal propensities to consume: an earnings heterogeneity ch...

Forward Guidance and Heterogeneous Beliefs

By Philippe Andrade, Gaetano Gaballo, Eric Mengus, and Benoît Mojon

American Economic Journal: Macroeconomics, July 2019

Central banks' announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Fo...

Is Government Spending at the Zero Lower Bound Desirable?

By Florin O. Bilbiie, Tommaso Monacelli, and Roberto Perotti

American Economic Journal: Macroeconomics, July 2019

We build a medium-scale DSGE model and calibrate it to fit the main macroeconomic variables during the US Great Recession. Using it to evaluate the welfare effects of increasing government consumption at the zero lower bound beyond what was actually obser...

Slow Moving Debt Crises

By Guido Lorenzoni and Iván Werning

American Economic Review, September 2019

We study slow moving debt crises: self-fulfilling equilibria in which high interest rates, due to the fear of a future default, lead to a gradual but faster accumulation of debt, ultimately validating investors' fear. We show that slow moving crises arise...

"Whatever It Takes" Is All You Need: Monetary Policy and Debt Fragility

By Antoine Camous and Russell Cooper

American Economic Journal: Macroeconomics, October 2019

The valuation of government debt is subject to strategic uncertainty. Pessimistic lenders, fearing default, bid down the price of debt, leaving a government with a higher debt burden. This increases the likelihood of default, thus confirming the pessimism...

Slow Post-financial Crisis Recovery and Monetary Policy

By Daisuke Ikeda and Takushi Kurozumi

American Economic Journal: Macroeconomics, October 2019

Post-financial crisis recoveries tend to be slow and accompanied by slowdowns in total factor productivity (TFP) and permanent losses in GDP. To prevent them, how should monetary policy be conducted? We address this issue by developing a model with endoge...

Some Evidence on Secular Drivers of US Safe Real Rates

By Kurt G. Lunsford and Kenneth D. West

American Economic Journal: Macroeconomics, October 2019

We study long-run correlations between safe real interest rates in the United States and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an intertermporal IS equation, by models of aggregate s...

Optimal Forward Guidance

By Florin O. Bilbiie

American Economic Journal: Macroeconomics, October 2019

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form...

The Paradox of Global Thrift

By Luca Fornaro and Federica Romei

American Economic Review, November 2019

This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the ...

The Term Structure of Currency Carry Trade Risk Premia

By Hanno Lustig, Andreas Stathopoulos, and Adrien Verdelhan

American Economic Review, December 2019

Fixing the investment horizon, the returns to currency carry trades decrease as the maturity of the foreign bonds increases. Across developed countries, the local currency term premia, which increase with the maturity of the bonds, offset the currency ris...

Self-Fulfilling Debt Crises: A Quantitative Analysis

By Luigi Bocola and Alessandro Dovis

American Economic Review, December 2019

This paper investigates the role of self-fulfilling expectations in sovereign bond markets. We consider a model of sovereign borrowing featuring endogenous debt maturity, risk-averse lenders, and self-fulfilling crises à la Cole and Kehoe (2000). In this...

Aging, Output Per Capita, and Secular Stagnation

By Gauti B. Eggertsson, Manuel Lancastre, and Lawrence H. Summers

American Economic Review: Insights, December 2019

This paper re-examines the relationship between population aging and economic growth. We confirm previous research such as Cutler et al. (1990) and Acemoglu and Restrepo (2017) that show positive correlation between population aging and per capita output ...

Deconstructing Monetary Policy Surprises—The Role of Information Shocks

By Marek Jarociński and Peter Karadi

American Economic Journal: Macroeconomics, April 2020

Central bank announcements simultaneously convey information about monetary policy and the central bank's assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector au...

Bond Convenience Yields and Exchange Rate Dynamics

By Rosen Valchev

American Economic Journal: Macroeconomics, April 2020

This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalizes both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as c...

Dynamic Debt Deleveraging and Optimal Monetary Policy

By Pierpaolo Benigno, Gauti B. Eggertsson, and Federica Romei

American Economic Journal: Macroeconomics, April 2020

This paper proposes a postcrisis New Keynesian model that incorporates agent heterogeneity in borrowing and lending with a minimum set of assumptions. Unlike the standard framework, this model makes the natural rate of interest endogenous and dependent on...