At an event at its central London Headquarters, chaired by The Times’ Economics Editor Philip Aldrick, Resolution Foundation Chief Economist Matthew Whittaker presented new analysis on the impact of monetary policy during the downturn. Former MPC member Kate Barker and Chief Economics Commentator at the Financial Times Martin Wolf then debated the future role of monetary policy, before taking part in a wider Q&A.

1. All bound up?
Monetary policy in recovery and beyond
AngusArmstrong, NIESR
KateBarker,economistandformerMPCmember
Martin Wolf, Chief Economics Commentator at the FT
PhilipAldrick, Economics Editor at theTimes
Matt Whittaker, Resolution Foundation
#zerobounds / @resfoundation

2. Renewed Interest
The role of monetary policy in crisis and beyond
MattWhittaker
January 2016
@mattwhittakerRF
2

3. 3
MONETARY POLICY
ENTERED NEW TERRITORY
POST-CRISIS

4. The 2008-09 cuts were not startling in their
depth, but in their destination: ZLB
The base rate was
cut by 4.5ppts
between Oct 08
and Mar 09,
broadly in line with
the average
loosening cycle
post 1970 of 5ppts
But the move took
the base rate to its
lowest ever level
(since 1699), with
the MPC
concluding that it
couldn’t go lower
4

5. To provide further stimulus the MPC introduced
QE, a policy not much discussed before 2008
Number of speeches mentioning QE
or related issues 1997-2007?
5
One (and that related toJapan)
Zero

6. 6
WE MAY BE CLOSER TO THE
NEXT DOWNTURN THAN WE
ARE TO THE LAST

7. Looking back over 300 years, we’re almost
certain to face at least one recession a decade
Probability curves
use the frequency
of recessions
during different
historic periods to
establish the
random chance of
a recession
occurring in a
single-year
horizon, and then
roll those
probabilities
forward over a 10-
year horizon
7

8. Post-war, the probability is a little lower, but
still high over a 10-year horizon
Probability curves
use the frequency
of recessions
during different
historic periods to
establish the
random chance of
a recession
occurring in a
single-year
horizon, and then
roll those
probabilities
forward over a 10-
year horizon
8

9. Post-globalisation, there’s an 84% probability
within 10 years
Probability curves
use the frequency
of recessions
during different
historic periods to
establish the
random chance of
a recession
occurring in a
single-year
horizon, and then
roll those
probabilities
forward over a 10-
year horizon
9

10. Post-globalisation, there’s an 84% probability
within 10 years
Probability curves
use the frequency
of recessions
during different
historic periods to
establish the
random chance of
a recession
occurring in a
single-year
horizon, and then
roll those
probabilities
forward over a 10-
year horizon
10

11. Market expectations imply a very gradual rise in
base rate over this period
OIS rates are
instruments that
settle on
overnight
unsecured
interest rates
and are the
basis of the five-
year
conditioning
path used by
the Bank of
England in its
Inflation Report
11

12. Pointing to a 2/3 chance of entering the next
recession with a base rate of just 1.6%
This is no more
than an
illustration –
outcomes could
look somewhat
different
But it highlights
the relatively
high likelihood of
re-encountering
the zero lower
bound in the
coming years
12

13. 13
LOWER HEADROOM AND
THE EFFECTIVENESS OF
POLICY

14. The monetary transmission mechanism
operates through a number of channels
14

15. The monetary transmission mechanism
operates through a number of channels
15
We focus on one element of this –
mortgage repayments

16. The 4.5ppt cut of 2008-09 helped to reduce
aggregate mortgage payments by £24bn
This reflects not
what actually
happened to
aggregate
repayments, but
what the specific
impact of rate
changes was
Actual payments
were affected by
changes in the
overall volume of
borrowing and the
arrival of new
borrowers
16

17. Though it also generated ‘losses’ for savers:
£11bn on sight deposits alone
As with the
mortgage
example, this
reflects not what
actually happened,
but the isolated
impact of rate
changes
Inclusion of time
deposits would
significantly
increase these
‘losses’, but we
also ignore other
loans such as
credit cards and
overdrafts
17

18. In hypothetical recession of 2021 with base rate
at 1.6%, mortgage ‘gains’ are cut significantly
In the 2021
scenario, total
mortgage debt is
assumed to have
increased to £1.6tn
and mortgage
rates have
increased by
0.6ppts
This doesn’t mean
the overall impact
of conventional
policy is cut by
one-third, but it
gives a sense of
scale
18

19. In hypothetical recession of 2021 with base rate
at 1.6%, mortgage ‘gains’ are cut significantly
In the 2021
scenario, total
mortgage debt is
assumed to have
increased to £1.6tn
and mortgage
rates have
increased by
0.6ppts
This doesn’t mean
the overall impact
of conventional
policy is cut by
one-third, but it
gives a sense of
scale
19

20. 20
IF NOT NOW, SOON

21. The zero lower bound is likely to loom more
regularly in a world of secular decline in rates
Real ‘world’
interest rates have
been declining for
some time – well
before the financial
crisis – driven by
slow moving
demographics and
secular savings and
investment
preferences
While some forces
might slow in the
coming years,
there is little
prospect of rates
rising rapidly
21

22. 22
LIVING WITH LOWER RATES

23. By their nature, many of the alternatives are
unconventional and uncomfortable
23
More QE
• Probably helped in 2009, but questions over its longer-term efficacy
Negative interest rates
• Already in place in parts of Europe, but raises exchange rate concerns
Higher inflation targets
• Supports higher equilibrium rates, but we’re struggling to reach 2%
More active fiscal policy
• Mon/fisc balance affects efficiency and distributional outcomes
Structural reform
• Strategies for growth and investment might tackle structural decline of
rates at source

24. Renewed Interest
The role of monetary policy in crisis and beyond
MattWhittaker
January 2016
@mattwhittakerRF
24

25. All bound up?
Monetary policy in recovery and beyond
AngusArmstrong, NIESR
KateBarker,economistandformerMPCmember
Martin Wolf, Chief Economics Commentator at the FT
PhilipAldrick, Economics Editor at theTimes
Matt Whittaker, Resolution Foundation
#zerobounds / @resfoundation

26. National Institute of Economic and Social Research
Comments on ‘Renewed Interest’ by
Matthew Whittaker
Dr Angus Armstrong, NIESR
Resolution Foundation, 28th January, 2016

27. National Institute of Economic and Social Research
Section 6: Policy options
MW raises an important ‘contingency policy’ question
Changes to the Inflation Target?
• Inflation targeting is the latest in a long list of monetary
regimes, E.g., Bretton Woods, Monetary Targeting
• What drives national inflation rates? For OECD countries
around 70% seems to be common factors (ECB, 2005)*
Do inflation expectations really drive demand and inflation, or
is it the other way around?
* Governor Carney ‘s speech to Jackson Hole (2015) reports lower correlations (based on a 47
country dataset) implying national central banks continue to determine the inflation rate.

28. National Institute of Economic and Social Research
Section 6: Policy options
Negative interest rates?
• If the ‘market clearing’ real interest rate is substantively
negative, then the ZLB becomes a limit on delivering this
• Two modern contenders for negative rates:
o Get rid of cash and impose negative rate on central
bank reserves (Buiter, 2004)
o Introduce an exchange rate between paper money and
central bank reserves (Eisler, 1932 and Kimball, 2015)
Are we repeating the mistake of ignoring banking sector? Banks
not be forced to raise lending rates (to protect profit margins)

29. National Institute of Economic and Social Research
Section 6: Policy options
Even more unconventional monetary policies?
• More Quantitative Easing?
o Keynes (1933) “trying to get fat by buying a larger belt”
o Probably had a positive influence through long rates
• Monetary financing
o Coordinated buying of Govt debt directly with no
commitment to reverse purchases
• Helicopter drops
o Directly supplying money to private sector

30. National Institute of Economic and Social Research
Section 6: Policy options
What might happen / where are the risks?
• US probably less risk to fiscal policy or even monetary
financing because of universal use of dollar
o If there are credit doubts, Fed can issue dollars and the
exchange rate can depreciate
• For other nations this is more difficult because international
banks borrow in dollars – large depreciation may be a problem
o UK has fiscal space and banking system does not seem
exposed to weaker sterling
• Elsewhere, is the answer to stop becoming so dependent on
dollars? Will we see more capital controls?

31. All bound up?
Monetary policy in recovery and beyond
AngusArmstrong, NIESR
KateBarker,economistandformerMPCmember
Martin Wolf, Chief Economics Commentator at the FT
PhilipAldrick, Economics Editor at theTimes
Matt Whittaker, Resolution Foundation
#zerobounds / @resfoundation