A prolonged period of low interest rates in Europe: Unintended consequences

Simona Malovana, Josef Bajzik, Dominika Ehrenbergerová and Jan Janků
Authors registered in the RePEc Author Service: Dominika Kolcunová

Journal of Economic Surveys, 2023, vol. 37, issue 2, 526-572

Abstract: We examine the potential adverse effects of a prolonged period of low interest rates on financial stability from multiple perspectives. First, we provide a unique comparison of natural rates of interest estimated using two approaches—with and without financial factors—for six large European countries inside and outside the euro area. Second, we provide a comprehensive review of the empirical literature, allowing us to identify and categorize financial vulnerabilities, which may be created and fueled by low interest rates. Third, we discuss a situation in which a prolonged period of low interest rates may lead to a point of no return by contributing to higher indebtedness, overvalued asset prices and underpriced risks, resource and credit misallocation, and lower productivity. With respect to all of that, we offer a few monetary policy considerations. Specifically, we suggest that (i) monetary policy should act symmetrically over the medium to long term, (ii) both the short‐term and long‐term costs and benefits of pursuing accommodative or restrictive monetary policy should be accounted for, and (iii) monetary and macroprudential policies need to be coordinated, and their interactions should be accounted for in order to find the best policy mix for the economy.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1111/joes.12499

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jecsur:v:37:y:2023:i:2:p:526-572

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0950-0804

Access Statistics for this article

More articles in Journal of Economic Surveys from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().