Monetary Policy and Financial System During Demographic Change:

Transcription

1 Monetary Policy and Financial System During Demographic Change: Three questions Gauti B. Eggertsson Brown University

2 1. Can demographic change account for worldwide decline in interest rate? 2. What is the impact of aging on GDP per capita? 3. What is the role for monetary and fiscal policy when fall in interest rate driven by demographic change?

3 Mar-89 Dec-89 Sep-90 Jun-91 Mar-92 Dec-92 Sep-93 Jun-94 Mar-95 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Jun Nominal Long Term Rates 5 years 1. Can demographic change account for worldwide decline in interest rate? Japan Germany US UK Eurozone

4 Quantitative evaluation Eggertsson, Mehrotra, Robbins (AEJ-macro 2019) 80 generation OLG model Calibrated to US data mortality rates, income profiles Life expectancy Productivity Public debt Bottom-line: Permanently negative rates well possible and consistent with current demographic and productivity configurations Calibrate the model to 2015: Can we explain the fall in interest rates? Yes What is the role of demographics

5 Quantitative evaluation Eggertsson, Mehrotra, Robbins (AEJ-macro 2019) Quantitative Result: Can account for a permanently negative real interest rate for standard parameter values calibrated to US data. Implication: No reason to expect normalization in real interest rate Current FOMC projection is that long run is +1% real rate. Paper -1.47% Implication: May very well be hitting the ZLB again and again in the future if calibration is reasonable 5

6 Quantitative evaluation Eggertsson, Mehrotra, Robbins (AEJ-macro 2019)

7 Quantitative evaluation Eggertsson, Mehrotra, Robbins (AEJ-macro 2019)

8 2. What is the impact of aging on GDP per capita? Eggertsson, Lancaster, Summers (AER-Insight 2019) Y N % = Y L % + L N % +,? Output per worker Labor force participation Capital per worker goes up due to fall in r so Y L

9 Annual Real GDP Change (%) MMR CHN BIH VNM MAC MDV LAO BTN KHM IND MOZ LKA KOR GRD STP TTO PAN CHL ALB BGD DOM CPV UGA MYS POL MUS ETH IRL IDN THA MNG SGP BLR PER TCD ARM GHA LSO BFA BWA AZE CRI HKG NGA QAT RWA ARG TUN URY NPL SYC UZB EGYKAZ SVK EST TKM KWTTZA MAR LBN SLV ROU PSE BOLTUR COL NAM IRN LBR PHL LTU LUX ISR ZMBNIC AUS BGR ECU BLZ JOR NOR PAK PRY SUR SVN MLI AGO HNDDJI ISL BRA AUT CZE LVA BEN USA GBR SWE NZL MRT GTM HUN NLD SWZ MKD DZA FJI BEL CAN DEU MWI FIN YEM ESP BDI MEX DNK CYP FRA IRQ ZAF PRT RUS ATG SAU KEN ZWE HRV LCA SEN COG BHR VEN CHE BRB GEO GRC MNE ITA OMN CMR GIN GMB JAM NER SLE SYR GNB CIV ABW BHS GAB KGZ COM TGO BRN SRB MDG HTI MDA UKR MLT JPN TJK ARE CAF COD Change in Ratio of Old to Young

10 Good news and bad Good news: Aging can actually lead to higher living standard. Bad news: This happens via lower real interest rate which cannot always take place due to ZLB

11 Change in GDP per capita Relationship break down post 2008 once ZLB become and issue BIH ZWE MMR CHN BDI TKM MAC VNM MDV KHM TTO BTN KOR KWT IRL MOZ CPV MAC LAO INDLKA CHL UGA ALB MYS DOM ARM MUS POL THA PAN LBN SGP BGD TUN IDN PER BLR HKG MLT GRD EGYQAT SVK BWA CRI EST LUX ARG AZE SLV ROU BFA TCD SYR IRN SVN LSO NGA CYP NPL NOR JOR YEM RWA BGR BLZ ATG CZE GHA ISL TUR GRC MNG TZAISR KAZ MAR URY AUS FIN LTU NAM AGO ETH COLBOL AUT ESP NLD MLI SYC SWEPAK GBR USA PSE HND DNK HUN LVA OMN PHL NIC NZL BRA CAN BEL PRT DEUHRV BEN SWZ MWI GTMECU SUR FRA MRT MEX STP LCA UZB PRY LBR ZMB DZAFJI VEN MKD DJI BRB ZAF ITA SEN CHE BHR JAM RUS ABW MNE IRQ SAUGIN GMB TKM BHS KEN GNB CMR COG NER BRN COM MDG CAF CIV GEOSRB UKR KGZ GAB TGO BDI HTI SLE ARE JPN CPV ETH MMR CHN SLE MNG UZB LAO IND LKA GEO GHA LBR SYC BGD BTN PAN VNM TCD RWA URY ZMBIDN MOZ KHM LSO MDV KAZ COD PHL TJKMDA DJI PER NPL BOL PRY COL BLR NGA PSE TZA DOM BFA KEN COG MYS ALB MUS POL SGP AZE GAB IRQ MAR ARG ECU CHL THA KOR STP UGA CIV SUR NAM KGZ TGO QAT BWA NIC CRI TUR LTU HKG CMRMRT SAU MKDBRA BEN FJI ISR MLT PAK NER TUN HND DZA SVK RUS AUS ARM EGY GTM NZL AGO SLV DEU EST GNB HTI MWI ROU LVA BGR MLI ZAFSWZ CAN SEN COM BLZ BHR MEX BIH GMB IRN MNE HUN SRB USA SWE BEL CHE GBR AUT IRL FRA CZE GIN JOR TTO NOR LUX BRB DNK NLD GRD LBN JAM ISL PRT LCA VEN BRN BHS SVNESP ABW ITA UKR MDG ARE HRV YEM ATG OMN CYP KWT GRC FIN JPN TJK ZWE MDA CAF SYR COD Change in the ratio of old to working age adults Change in the ratio of old to working age adults The reversal in correlation is driven by ZLB countries

12 What is the impact of aging on GDP per capita? Eggertsson, Lancaster, Summers (AER-Insight 2019) Aging does not have negative effect on output per capital provided interest rate can flexibly adjust to accommodate capital deepening. If the ZLB prevents this adjustment, aging unambiguously lead to slower growth in GDO per capita environment of secular stagnation

13 3. What can monetary and fiscal policy policy do? 0 > r t n< r t Natural or neutral rate Fiscal Policy -- more debt? Unconventional MP -- unconventional MP Equilibrium rate Monetary Policy r t = i t E t π t+1 Negative policy rates? Higher Inflation Target

14 Fiscal policy and unconventional policy We saw very large increase in debt needed in quantitative model More than 200 percent of GDP!! Offsetting effect of expectations of fiscal crisis? Garga (2018) Evidence for the effect of unconventional monetary policy in absence financial crisis mixed at best.

15 Negative Interest Rates and the Bank Lending Channel Eggertsson, Juelsrud, Summers and Wold (2019, NBER WP) Cut in policy rate filter into interbank market X Deposit rates of banks offer to customer go down X Lending rates go down

16 Negative Interest Rates and the Bank Lending Channel Eggertsson, Juelsrud, Summers and Wold (2019, NBER WP)

17 Negative Interest Rates and the Bank Lending Channel Eggertsson, Juelsrud, Summers and Wold (2019, NBER WP) Deposit rates are bounded by zero!

18 Negative Interest Rates and the Bank Lending Channel Eggertsson, Juelsrud, Summers and Wold (2019, NBER WP) Lending rates increased rather than decreased as interest rate became very negative!

19 Higher Inflation Target forwards guidance Eggertsson, Mehrotra, Robbins (AEJ-macro 2019 r t = i t E t π t+1 Key new insight of secular stagnation literature: Forward guidance about interest rates useless Raising inflation target does nothing if not high enough. Increasing inflation target only allows for a new equilibrium does not guarantee it.

20 Conclusion Persistently low interest rate raise challenges that I think remain unresolved. The solution that was proposed at the very beginning of Japan problems in 1990 s still seems the right one: Higher inflation. Why has no-one experimented with it? One issue not touched upon on: Many countries at the ZLB give perverse incentive to trade wars due to negative externality of current account surpluses.