Tag Archives: Loanable funds

Drivers of long-term global interest rates – can changes in desired savings and investment explain the fall?

Authors: Lukasz Rachel and Thomas Smith.

In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates.  We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital.  Together we think these secular trends can account for 300bps of the historic decline in the global real rate.  Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%. Continue reading

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Filed under Financial Markets, International Economics, Macroeconomics, Monetary Policy

Banks are not intermediaries of loanable funds – and why this matters

Zoltan Jakab & Michael Kumhof

Problems in the banking sector played a critical role in triggering and prolonging the Great Recession. Unfortunately, standard macroeconomic models were initially not ready to provide much support in thinking about the role of banks. This has now changed, with many new papers that study the interaction of banks with the macroeconomy. However, as emphasized by Adrian, Colla and Shin (2013), there are many unresolved issues. In our new paper “Banks Are Not Intermediaries of Loanable Funds – And Why This Matters” (Jakab and Kumhof (2015)), we argue that many of them can be traced to the fact that virtually all of the newly developed models are based on the intermediation of loanable funds (ILF) theory of banking. Continue reading

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Filed under Banking, Financial Stability, Macroeconomics, Macroprudential Regulation