Nyberg: After the crisis – new thoughts on monetary policy
Deputy Governor Lars Nyberg held a speech on Monday at Nordea. He noted that crises not only affect economic developments, but often raise more fundamental questions regarding the functioning of the economy. He took up three areas, which will probably be discussed in the coming period, both in the central bank world and in academic research.
The first is the question of whether expansionary monetary policy with low interest rates over a long period of time may induce banks to take greater risks. If so, this could be seen as a “risk-taking channel” in the monetary policy transmission mechanism. Mr Nyberg sees the question of how low interest rates may affect risk taking, both by the banks and in society in general, to be an interesting one that requires further research.
The second area is the question of whether the slow recovery in many countries is due to a “balance sheet recession”, where the main objective of the participants in the economy is to consolidate their balance sheets. In this situation, consumption and investment may be weak over a long period of time, and it may be difficult to stimulate the economy, even with low interest rates.
The third area concerns a more active use of regulation in the future, aimed at preventing credit-financed bubbles, requiring greater coordination of the work on monetary policy and on promoting financial stability. Interest rate adjustments and changes in regulations may have similar effects and it may therefore be necessary to coordinate their use. One important issue to resolve in the coming years is an appropriate allocation of responsibilities and powers of authority between the different bodies.
Read the speech in full in the PDF below.
