Benign Neglect of the Long-Term Interest Rate
51 Pages Posted: 12 Apr 2013
Date Written: February 2013
Abstract
Large-scale central bank purchases of government bonds have made the long-term interest rate key in the monetary policy debate. How central banks react to bond market movements has varied greatly from one episode to another. Driving the term premium in long-term rates negative may stimulate aggregate demand. And a negative term premium encourages borrowers to lengthen the maturity of their debts. Such a reduction in maturity risks makes the financial system more resilient to shocks, and in particular can help emerging economies finance their heavy infrastructure and housing investment needs more safely. But an extended period of very low long rates and high public debt creates financial stability risks. Interest rate risk in the banking system has grown, and some institutional investors face significant exposures. Central banks in the advanced economies now hold a high proportion of bonds issued by their governments, most of which have so far failed to arrest the rise in the ratio of government debt to GDP. Implementing an effective exit strategy will be difficult. Current policy frameworks should be reconsidered, with a view to clarifying the importance of the long-term interest rate for monetary policy, for financial stability and for government debt management.
Keywords: Central banks, bond market crisis, exit strategy, sovereign debt management
JEL Classification: E43, E52, E58, H63
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Is the Long-Term Interest Rate a Policy Victim, a Policy Variable or a Policy Lodestar?
-
Surveillance by International Institutions: Lessons from the Global Financial and Economic Crisis
-
Perspectives on Inflation Targeting, Financial Stability and the Global Crisis
By Mar Gudmundsson, Camilo E. Tovar, ...