Blog Post

Central bank rates deep in shadow

Measuring the impact of monetary policy on the economy at the zero lower bound is difficult. After 2008, central banks cut policy rates close to zero and implemented various unconventional measures, such as large-scale asset purchases in the United States, United Kingdom and Japan, or long-maturity lending to banks in the euro area.

By: Date: December 5, 2014 European Macroeconomics & Governance Tags & Topics

Measuring the impact of monetary policy on the economy at the zero lower bound is difficult. After 2008, central banks cut policy rates close to zero and implemented various unconventional measures, such as large-scale asset purchases in the United States, United Kingdom and Japan, or long-maturity lending to banks in the euro area. More recently, the European Central Bank cut deposit rates below zero and started the purchase of asset backed securities and covered bank bonds. Such unconventional measures are not reflected in key policy rates, which are stuck near zero.

At the zero lower bound other monetary indicators are needed. As I argued in a recent working paper, a properly measured indicator of money (the so-called Divisia-money) is one such indicator. Another indicator is a so-called estimated shadow interest rate. Such rates are estimated for the US, UK and euro area by Jing Cynthia Wu and Fan Dora Xia, who utilised information from the term structure of interest rates in an unobserved components model. Their shadow rate estimates are virtually the same as the policy rates when policy rates were well above zero, but their shadow rate estimates turned negative for certain periods when the policy rates were very close to zero. Money and shadow rates are interlinked: in my working paper I found that a fall in the shadow rate increases Divisia-money growth and in turn an increase in Divisia-money growth increases GDP growth.

In a post seven months ago, Ashoka Mody plotted shadow rate estimates for the US and the euro-area and argued that the ECB must and can act. Since the ECB has announced a number of monetary policy measures since then, let’s look at more recent shadow rate developments.

Policy rates and estimated shadow rates (%)

Sources: Jing Cynthia Wu’s website for shadow rates, ECB, Bank of England and Federal Reserve Board for policy rates.

The figure suggests that the ECB achieved a much less accommodative monetary stance than the Federal Reserve and the Bank of England. The recent measures (negative deposit rate, new long term refinancing operations and some asset purchases) pushed the estimated shadow rate below zero, yet it is still much higher than the approximately minus 3 percent shadow rates estimated for the US and UK for 2013-14, even though quantitative easing has ended there.

Since both the current inflation (0.3% in November 2014) and expected inflation (see Silvia Merler’s post on this) in the euro area is well below the inflation in the US and UK and well below 2%, there is indeed a strong case for the ECB to act. Ashoka Mody is right that the ECB is again well behind the curve.

A sizeable quantitative easing programme can have an impact in the euro area too, as we argued in a policy contribution I wrote with Grégory Claeys, Silvia Merler and Guntram B. Wolff in May this year. A good starter would be the purchase of European debt, which currently has an eligible pool of around €490 billion of EFSF, ESM, EU and EIB bonds.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic

Policy Contribution

PC 12 2017COVER2

The global decline in the labour income share: is capital the answer to Germany’s current account surplus?

Analysing the major divergences between the three largest euro-area countries in terms of unit labour costs and current accounts, to the broader debate on labour income shares. Data suggests that capital and labour have been complements.

By: Bennet Berger and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 26, 2017
Read about event More on this topic

Upcoming Event

May
11
12:30

Financial Times - Bruegel Forum: the future of Europe after the French election

The second event in the Financial Times - Bruegel Forum series will look at how the results of the French elections will affect Europe.

Speakers: Guntram B. Wolff and Tony Barber Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author

Working Paper

Cover WP 2017_06

Regional and global financial safety nets: the recent European experience and its implications for regional cooperation in Asia

Comparing and evaluating financial assistance programmes of four euro-area countries (Greece, Ireland, Portugal, and Cyprus) and three non-euro-area countries (Hungary, Latvia, and Romania) of the European Union in the aftermath of the 2007/08 global financial and economic crisis. Asian countries can draw several lessons from European experiences.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance Date: April 20, 2017
Read article More on this topic More by this author

Podcast

Podcast

Labour mobility in Europe

With anti-immigration sentiment on the rise, we look into the issue of labour mobility in Europe. How does migration affect labour markets and how does perception of migration differ from reality? What are the economic challenges for migrants and how do these challenges reflect on social integration? We try to answer these questions with our guests in this episode of The Sound of Economics.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: April 20, 2017
Read about event More on this topic

Past Event

Past Event

Understanding the French elections

This is a restricted workshop on the forthcoming French elections to understand the challenges and possible scenarios.

Speakers: Grégory Claeys, Thomas Guénolé-Ryzhakov, Bruno Jeanbart and Guillaume Tusseau Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 19, 2017
Read about event

Upcoming Event

May
30
11:00

Geo-blocking in the digital single market

Geo-blocking is a discriminatory practice that is wide-spread in EU. It prevents online customers from accessing and purchasing products or services from a website based in another member state

Speakers: Felipe Florez Duncan, Marine Elgrichi, J. Scott Marcus, Fabian Paagman, Bertin Martens, Georgios Petropoulos, Agustin Reyna, Werner Stengg and Roza von Thun Topic: European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Upcoming Event

May
31
12:30

Inclusive growth: global and European lessons for Spain

Can manufacturing still be a driver for inclusive growth around the world? What European and national policies can foster inclusive growth in Europe? What is the situation in Spain and what can Spain learn from the global and European experiences?

Speakers: Cristina Cabrera, Zsolt Darvas, Maria Demertzis, Alejandra Kindelán, Robert Lawrence and Federico Steinberg Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Calle Los Madrazo 36-38 Madrid
Read about event More on this topic

Upcoming Event

Jun
1-2
08:30

Fiscal frameworks in europe: background and perspectives

On 1-2 June Bruegel together with Danmarks Nationalbank and the Copenhagen Business School will organise a conference about fiscal frameworks in Europe. The conference will re-evaluate fiscal frameworks in Europe in light of experience gathered since the formation of the Economic and Monetary Union (EMU). The implications for the design of fiscal policy stemming from […]

Topic: European Macroeconomics & Governance Location: Danmarks Nationalbank
Read about event More on this topic

Past Event

Past Event

Can EMU survive a multi speed Europe?

On 6 April Bruegel, as in previous years, hosted the presentation of the Euro Yearbook, a collection of experts’ insights on the construction of the European Monetary Union through 2016.

Speakers: Pablo Zalba Bidegain, Maria Demertzis, Fernando Fernandez, Javier Méndez Llera, Karl Pichelmann and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 6, 2017
Read about event

Past Event

Past Event

Micro- and macro-based methods in assessing the impact of investment

This workshop will discuss methods for accurately evaluating the performance of public and private investment initiatives.

Speakers: Francesco Di Comite, Grégory Claeys, Zsolt Darvas, Helmut Kraemer- Eis, Áron Gereben, Robert P. Lieli, Simon Mizrahi, Amine Ouazad, Debora Revoltella, John K. Swales, Simone Signore, Natacha Valla, Marcin Wolski and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 5, 2017
Read article More on this topic More by this author

Blog Post

B Coeuré - photo

Central bank communication in a low interest rate environment

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at an event organised by Bruegel, Brussels, 31 March 2017

By: Benoît Coeuré Topic: European Macroeconomics & Governance Date: March 31, 2017
Read about event More on this topic

Past Event

Past Event

Central bank communication in a low interest rate environment

At this event, we are pleased to welcome Mr. Benoît Coeuré, Member of the Executive Board of the European Central Bank at Bruegel.

Speakers: Benoît Coeuré and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2017
Load more posts