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Summary paper Questions Future Research Discussion of “Monetary Policy, the financial cycle and ultra-low interest rates” by M. Juselius, Claudio Borio, Piti Disyatat and Mathias Drehmann Marente Vlekke 1 1 CPB Netherlands Bureau for Economic Policy Analysis DNB Workshop on Estimating and Interpreting Financial Cycles, September 2 2016 Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Outline Summary paper 1 Questions 2 Future Research 3 Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research What explains the secular decline in real interest rates? Prevailing views Dominating explanation: Declining rates reflect decline in the ‘equilibrium’ or ‘natural’ rate of interest (NRI). Low NRI because: higher propensity to save, growing preference for ‘safe’ assets (e.g. Bean et al. (2015)) and recently “Secular Stagnation” (Summers, 2014). Key assumptions: NRI is consistent with Y = Y ∗ . Inflation is key signal to determine if Y = Y ∗ . → inherent tension between natural rate and financial stability? Juselius et al.: this view is too narrow. Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research What explains the secular decline in real interest rates? According to Juselius et al. 2 measures of the financial cycle: “leverage gap” (LG) ≈ deviations from credit-to-asset ratio (1 − (1+ i ) − s ) ∗ C i “debt service gap” (DSG) ≈ deviations Y Findings: Use in VAR → LG and DSG have systematic and lasting impact on Y . Use in state space model → estimates for finance-neutral NRI and Y ∗ . Counterfactual experiments: augmented Taylor rule → dampens financial cycle → higher Y , higher NRI. Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research What explains the secular decline in real interest rates? According to Juselius et al. A ‘finance neutral’ NRI is higher and declines less than standard NRI. Policy rates structurally lower than NRI → monetary policy too expansionary. Overexpansionary monetary policy → financial booms and busts → decline in Y ∗ → decline NRI. Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Contributions Links monetary policy to financial cycles. Emphasizes importance of interest rates in credit-to-GDP cycles. Very rich paper: a VAR model, a state space model and 2 counterfactual experiments. Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Questions Isolating the effect of mortgages What about effects mortgages vs other assets? (”The Great Mortgaging”, Jord´ a et al. (2014)) Figure: Bank Lending-to-GDP (Source: Jord´ a et al. (2014)) Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Questions Estimation of LG and DSG DSG and LG are not directly observed → estimate via state space model? Complete the model? (1 − (1+ i ) − s ) ∗ C i Assumptions on Y ? Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Questions Estimation of LG and DSG (1 − (1+ i ) − s ) ∗ C i Assumptions on Y ? Figure: Mortgage types in the Netherlands (Source: DNB) Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest

Summary paper Questions Future Research Future Research Compare countries. The Euro area: one policy rate, many NRI’s... Analysis effects of different types of assets (mortgages). Marente Vlekke Discussion of “Monetary Policy, the financial cycle and ultra-low interest