Royal Economic Society
Royal Economic Society
Royal Economic Society The Austin Robinson Prize Presented by Morten Ravn
Royal Economic Society The Austin Robinson Prize Fabian Herweg and Daniel Mutter
Royal Economic Society
Royal Economic Society RES Presidential Address Charles Bean Living with Low for Long Chair: Morten Ravn
Royal Economic Society
Royal Economic Society
Liv Living wit ith Lo Low for Lo Long Ch Charl rles Be Bean Lon ondon Sch choo ool of of Econ onomics cs Royal Economic Socie ciety ty Pres esidenti tial Ad Addr dress Univ niversity of f Manch chester, 1 1 Ap Apri ril 20 2015
Chart 1: 300 years of the BoE policy and consol rates 18 16 14 12 10 8 6 4 2 0 Bank Rate Consol rate Source: Bank of England Historical database (http://www.bankofengland.co.uk/research/Pages/onebank/datasets.aspx#4)
Chart 2: Yield on 3-month and 10-year US Treasuries Source: Hartnett & Leung (2015) “The Longest Pictures”, Bank of America/Merrill Lynch
Chart 3: “World” real interest rate , 1985-2013 (Spot yields on 10-year indexed bonds, G7 ex Italy) Source: King and Low (2014 ) “Measuring the World Real Interest Rate”
Chart 4: UK real interest rate, 1700-2004 Source: Miles, Baker and Pillonca (2005)
Chart 5: Estimates of US short-term and long- run “World” real interest rates Source: Hamilton, Harris, Hatzius and West (2015) “The Equilibrium Real Funds Rate: Past, Present and Future”
Growth and the interest rate Assume an additively separable iso-elastic utility function with 𝐷 1−𝛽 intra-period utility: 𝑉 𝐷 = 1−𝛽 The Euler equation is: 𝑢 + 𝛽 2 𝜏 2 /2 − 𝜀)/𝛽 𝐹 𝑢 [∆𝑑 𝑢+1 ] = (𝑠 where 𝑑 𝑢 = logarithm of consumption at date 𝑢 ; 𝑠 𝑢 = real interest rate between 𝑢 and 𝑢 + 1 ; 𝜀 = household discount rate; 𝜏 2 = variance of the growth rate of consumption.
Chart 6: Global capital market Real S interest I rate S’ I’ O S O’ I S’ I’ Investment, Savings
It is not so easy to foresee the future… • “Heavier -than- air flying machines are impossible.” (Lord Kelvin, President of the Royal Society, 1895) • “Everything that can be invented has been invented.” (Charles Duell, Commissioner, US Office of Patents, 1899) • “The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?” (David Sarnoff Associates, 1920s) • “Who the hell wants to hear actors talk?” (Head of Warner Brothers, 1927) • “I think there is a world market for maybe five computers.” (Thomas Watson, Chairman of IBM, 1943) • “There is no reason anyone would want a computer in their home.” (Ken Olsen, Chairman of DEC, 1977)
Chart 7: Savings and investment shares (% of GDP) Source: IMF WEO database
Table 1: Longevity and change in required savings Life expectancy (years) Change in required savings* (share of GDP) 1970 1990 2010 1970-90 1990-2010 US 70.9 75.3 78.6 2.08 0.72 China 62.9 69.5 74.9 -0.08 1.34 Japan 72.0 78.9 82.9 1.49 1.46 Germany 70.6 75.3 80.5 0.60 0.76 *The required-savings calculation assumes complete consumption- smoothing from the age of ten until expected death, taking into account years of education, normal retirement age and population growth. Source: Teulings and Baldwin (2014), Secular Stagnation: Facts, Causes and Cures
Chart 8: Savings rates by household type (a) Source: Living Costs and Food (LCF) survey. (a) Saving ratios calculated using the average consumption and disposable income levels for each group of households. Numbers in parentheses show their share of total income in 2007. (b) High-debt mortgagors are defined as having outstanding mortgage debt of more than twice their annual disposable income. All other mortgagors are low debt.
Chart 9: Safe and risky yields 10 10 % % United Kingdom United States 8 8 6 6 4 4 2 2 0 0 Equities* 10-year indexed gilts Equities* 10-year TIPS -2 -2 *Leverage-adjusted inverted Price-Earnings ratio. Source: Bank of England, following Broadbent (2014) “Monetary policy, asset prices and distribution ”.
A loanable funds model with safe and risky assets 𝑔 𝜍 𝑇 𝑄𝑠𝑗𝑤𝑏𝑢𝑓 𝑠, 𝑠 + 𝜍; … = 𝐽(𝑠 + 𝜍; … ) Risky assets: (+) (+) (+) (-) 1 − 𝑔 𝜍 𝑇 𝑄𝑠𝑗𝑤𝑏𝑢𝑓 𝑠, 𝑠 + 𝜍; … + 𝑇 𝑄𝑣𝑐𝑚𝑗𝑑 = 0 Safe assets: where: 𝑠 = yield on safe assets and 𝜍 = spread between the expected return on risky capital assets and the safe return. The sum gives the usual loanable funds relationship: Loanable funds: 𝑇 𝑄𝑠𝑗𝑤𝑏𝑢𝑓 𝑠, 𝑠 + 𝜍; … + 𝑇 𝑄𝑣𝑐𝑚𝑗𝑑 = 𝐽(𝑠 + 𝜍; … ) The ratio gives an allocational relationship determining the spread: Funds allocation: 𝜒 𝜍 ≡ 𝑔 𝜍 1 − 𝑔 𝜍 = −𝐽(𝑠 + 𝜍; … )/𝑇 𝑄𝑣𝑐𝑚𝑗𝑑
Chart 10: Equilibrium with safe and risky assets IS Spread, 𝜍 ISʹ Oʹ O O ʺ FF FFʹ Safe rate, 𝑠
Table 2: Decline in supply of “safe” assets US$ trn % of World GDP 2007 2011 2007 2011 US sovereign debt 5.1 10.7 9.2 15.8 German & French sovereign debt 2.4 3.3 4.5 4.8 Italian & Spanish sovereign debt 2.4 3.1 4.3 4.7 US MBS and ABS 11.3 9.6 20.2 14.2 “Safe” assets 20.5 12.3 36.9 18.1 Source: Caballero and Farhi (2014 ) “On the role of safe asset shortages in secular stagnation ”.
Chart 11: Sterling liquid assets of UK banking sector (a) (b) Percentage of Broad ratio total assets (c) Reserve ratio (all currencies) (d) Narrow ratio 35 30 25 20 15 10 5 0 1968 73 78 83 88 93 98 2003 08 13 Source: Bank of England. (a) Data for building societies are included from 2010 onwards. Prior to this, data are for UK banks only. Data are end-year except for 2013 where end-November data are used. (b) Broad ratio: Cash + Bank of England balances + money at call + eligible bills + UK gilts. (c) Reserve ratio proxied by Bank of England balances + money at call + eligible bills. (d) Narrow ratio: Cash + Bank of England balances + eligible bills.
Chart 12: Spot and forward yields on UK indexed gilts Real 10-year spot Real 10-year 10-years forward 5 4 3 2 1 0 -1 -2 Source: Bank of England
Chart 13: Forward Guidance - a calibrated example Source : Bean “Nominal income targets: A new wine in an old bottle?” (2013).
Chart 14: Bank of England consolidated balance sheet Source: Bank of England
Liv Livin ing wit ith Lo Low for or Lon Long Th The e End
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