Monetary policies all over the world are such that interest rates are at their lowest rate ever. In some economies, the rate is negative so that it costs to keep money in banks rather than “under the bed”. This is unprecedented! Despite this, borrowing for new investment is weak – with implications on future productivity and economic growth.
The low interest rates mean that there is little scope to reduce them further, which in turn means that monetary authorities have little scope for managing economic activity – employment, production and investment.
In the past, monetary policy formulations have focuses on short-term “shock” factors, assuming that after these “shocks” to aggregate supply or demand, interest rates would return to some “equilibrium” which would be 1 or 2 percentage points above the targeted inflation rate. Mainstream models assumed that long-term factors cancel one another out in “swings and roundabouts”.
Gertjan Vliegje argues that debt, demographics and the distribution of income are long-term structural factors which have slowly and separately exerted themselves and re-inforced one another to lower the “equilibrium” interest. As a result, he believes that the record low interest rates are likely to stay low for a long time – even decades.
With monetary policy ineffective, and given already hight public debt levels, the ability of governments to control economic activity is severely limited.
Dr Gertjan Vlieghe has been a member of the Monetary Policy Committee of the Bank of England since September 2015. Prior to his appointment he had been a partner and senior economist at Brevan Howard Asset Management, researching global macroeconomic trends and their interaction with asset prices. From 2005 to 2007 he was a bond strategist at Deutsche Bank. From 1998 to 2005 he held a number of posts at the Bank of England, including the post of Economic Assistant to Governor Mervyn King. He holds a doctorate from the London School of Economics and Political Science.
Recorded 18 January 2016 at LSE