Paul Schmelzing is a visiting scholar at the Bank from Harvard University, where he concentrates on 20th century financial history. In this guest post, he looks at how global real interest rates have evolved over the past 700 years.
With core inflation rates remaining low in many advanced economies, proponents of the “secular stagnation” narrative –that markets are trapped in a period of permanently lower equilibrium real rates- have recently doubled down on their pessimistic outlook. Building on an earlier post on nominal rates this post takes a much longer-term view on real rates using a dataset going back over the past 7 centuries, and finds evidence that the trend decline in real rates since the 1980s fits into a pattern of a much deeper trend stretching back 5 centuries. Looking at cyclical dynamics, however, the evidence from eight previous “real rate depressions” is that turnarounds from such environments, when they occur, have typically been both quick and sizeable.
Paul Schmelzing, Harvard University.
Paul Schmelzing is a visiting scholar at the Bank from Harvard University, where he concentrates on 20th century financial history. In this guest post, he looks at the current bond market through the lens of nearly 800 years of economic history.
The economist Eugen von Böhm-Bawerk once opined that “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. But as rates reached their lowest level ever in 2016, investors rather worried about the “biggest bond market bubble in history” coming to a violent end. The sharp sell-off in global bonds following the US election seems to confirm their fears. Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded. History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 “bond massacre”.
Roy Zilberman and William Tayler.
Last year the Bank organised a research competition to coincide with the launch of the One Bank Research Agenda. In this guest post, the authors of the winning paper in that competition, Roy Zilberman and William Tayler from Lancaster Business School, summarise their work on optimal macroprudential policy.
Can macroprudential regulation go beyond its remit of financial stability and also contain inflation and output fluctuations? We think it can and argue that macroprudential regulation, in the form of countercyclical bank capital requirements, is a superior instrument to both conventional and financially-augmented Taylor (1993) monetary policy rules. This is especially true in responding to financial shocks that drive output and inflation in opposite directions, as also observed at the start of the recent financial crisis (see Gilchrist, Schoenle, Sim and Zakrajsek (2016)). This helps to effectively shield the real economy without the need for a monetary policy interest rate intervention. Put differently, a well-designed simple and implementable bank capital rule can achieve optimal policy associated with zero welfare losses.
The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”. In this guest post, one of the keynote speakers at the event, Andrew Gelman professor of statistics and political science at Columbia University, points out some of the pitfalls of randomly assigned experiments with control groups.
When studying the effects of interventions on individual behavior, the experimental research template is typically: Gather a bunch of people who are willing to participate in an experiment, randomly divide them into two groups, assign one treatment to group A and the other to group B, then measure the outcomes. If you want to increase precision, do a pre-test measurement on everyone and use that as a control variable in your regression. But in this post I argue for an alternative approach- study individual subjects using repeated measures of performance, with each one serving as their own control.
Samuel Cole, Jack Sherer-Clarke, Oliver Wallbridge, Annabel Manley.
Each year, the Bank of England organises the Target 2.0 competition for A-level economics students. In this guest post, the winning team at March’s national final from Pate’s Grammar School explain what they would do if they were the MPC…
We decided as a team to hold the Bank Rate at 0.5% and to maintain asset purchases at £375bn. In our view it is not yet time to tighten monetary policy. Though we believe the output gap is small, the economy is yet to reach escape velocity and the Wicksellian natural rate of interest is likely to remain depressed. We are more optimistic on potential supply than other economists and think oil prices will stay low. As such, we predicted that inflation will only reach 1.7% in 2018Q1 compared to the MPC’s median forecast in February of around 2.1% (which has since fallen to 1.9%).