WHow much is the monetary policy of the European Central Bank (ECB) in the currently extremely low interest rates? Various economists have dealt with this question in the current “Wirtschaftsdienst”, a magazine for economic policy. As reported, the chief economist of the European Central Bank (ECB), Philip Lane, mentioned last year in a sensational speech in Dublin in particular three reasons why real interest rates, i.e. interest rates taking inflation into account, have long been very low in the euro area are. One reason is the falling potential growth in the industrialized countries; In addition, there are demographic trends, and last but not least, it is important that the financial market participants place greater emphasis on safe investments in their portfolios. In his speech, Lane had by no means ruled out the effects of monetary policy on interest rates, but he had identified other reasons for the long-term development of real interest rates.
The ECB is particularly under attack in Germany
This is opposed to a view widespread among ECB critics in Germany, who claimed that expansionary monetary policy was an important cause of low interest rates, writes Clemens Fuest, President of the Ifo Institute, in “Wirtschaftsdienst”. In the opinion of the ECB critics, the aim of this policy was “to relieve the heavily indebted economies in southern Europe”, the consequence was “a redistribution at the expense of savers with small and medium incomes in particular”. According to his analyzes, Fuest expressly opposes this view. There is evidence that there is a “global and long-term trend towards low interest rates”. This implies that “it does not seem very convincing to name the current monetary policy of the ECB or other central banks as the main reason for the low interest rates”. At the same time, monetary policy had “significantly strengthened” the trend towards low interest rates.
What role do the financial cycles play?
Düsseldorf economist Ulrike Neyer looks into the possible effects of monetary policy on long-term capital market interest rates. The general argument in economics is that monetary policy has no real effects in the long term, it is “neutral” in the long term. Taking up recent considerations by Claudio Borio, the chief economist at the Bank for International Settlements, and others, this is questioned. Variables such as demographic development or potential growth could not adequately explain the development of real interest rates over a long period. “The authors use a theoretical model to argue that monetary policy has an impact on the trend in real interest rates over financial cycles.” Central bank interest rates, which have been kept low since the financial crisis, could well help explain the trend in real interest rate declines.
Among other things, Marcel Fratzscher and Alexander Kriwoluzky from the DIW research institute are concerned with the contribution of the states to low interest rates. You write that since the financial crisis there has been a higher demand for risk-free securities and a lower supply. For example, the crisis has led to fewer countries in Europe being given “risk-free” status by the rating agencies. In addition, Germany, the most important economy in Europe, has reduced the debt ratio from just over 80 to about 60 percent. The authors describe further reasons for the low interest rates, but think: “The conclusion is that it is not monetary policy that is required to raise interest rates, but that it is primarily the German state that will pass the real interest rate at short notice a wise investment program and increased debt provision. “
Ifo President Fuest contradicts this assessment in his contribution. Low interest rates, as described, are a global and long-term trend: “The claim that the end of the black zero in German financial policy allows interest rates to be raised again is misleading,” says Fuest. “The influence of German fiscal policy on global interest rates is too small.”