Global risks from rising debt and asset prices

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Question 1: Does the world economy face heightened risks arising from an excess of public and private debt and/or inflated asset prices?

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Question 2: Is the loose monetary policy of major central banks responsible for the recent increase in global leverage or asset values?

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Summary

The outgoing German finance minister, Wolfgang Schäuble, has recently expressed concerns about the risks posed to the world economy by high levels of debt. In the latest Centre for Macroeconomics and CEPR survey of leading economists, a strong majority of respondents agree that an excess of public and private debt together with inflated asset prices mean that the world economy faces heightened risks. A similarly strong majority of the experts also agree that the loose monetary policy of major central banks is responsible for the recent increase in global leverage and asset values.

Background

Wolfgang Schäuble, the outgoing German finance minister, warned in an FT interview this week that ‘economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt.

This follows an assessment by the Bank of International Settlements, whose chief economist, Claudio Borio has tied inflated asset values to loose monetary policy: ‘We do not fully understand the factors at work. But surely the unprecedented gradual pace of monetary policy normalisation has played a role. Another factor could be market participants’ belief that central banks will not remain on the sidelines should unwarranted market tensions rise. All this underlines how much asset prices appear to depend on the very low bond yields that have prevailed for so long.

Risks posed by rising debt and asset prices

The first question of the latest CFM-CEPR expert survey asked panel members about the risks that debt poses to the world economy.

Question 1: Does the world economy face heightened risks arising from an excess of public and private debt and/or inflated asset prices?

Sixty panel members answered this question. A strong majority of 65% either agree or strongly agree, 15% neither agree nor disagree, 18% disagree, nobody strongly disagrees and 2% have no opinion. Leaving out the respondents who neither agree nor disagree or have no opinion, the majority increases to 78%. The outcome is similar when answers are weighted with self-reported confidence levels.

Despite the broad consensus, several participants point out that this is not an easy question. Jonathan Portes (King’s College London) argues that: ‘It is of course almost impossible to call ‘bubbles’ ex ante … And it is even harder to predict precisely how a sharp reversal would manifest itself and how large any negative consequences would be.

But he and several others also think that the warning signs are there. In fact, more than a few panel members point out that debt levels and asset prices are at historically high levels. Roger Farmer (University of Warwick and National Institute of Economic and Social Research), who strongly agrees (and is extremely confident), is especially worried and writes: ‘PE [price-earnings] values are close to all time highs. They can go up further. But they WILL eventually crash with very bad consequences.

Morten Ravn (University College London) points to a particular reason why we should be more worried now, specifically: ‘Large gross asset and liability positions are a risk especially since households and firms might have got used to a low interest rate environment.’

Ricardo Reis (London School of Economics) reminds us of the reason to be concerned about high debt levels, namely: ‘Increases in credit seem to be predictive of financial crises, and likewise for the level of public debt and sovereign debt crises’; although he qualifies this statement by adding: ‘But the associations are weak, not very stable, unclear if causal, and there are lots of false positives.’

Several panel members point to particular current risks. Sweder van Wijnbergen (Universiteit van Amsterdam) warns that: ‘German banks are loaded up with German debt to the extent of almost three times their capital value.

Pietro Reichlin (Università LUISS G. Carli) thinks that it is ‘mainly a public debt problem. … Low interest rates in these countries and loose monetary policy reduce governments’ incentives to make fiscal consolidations and banks’ incentives to dispose of non-performing loans.’

By contrast, Andrew Mountford (Royal Holloway, University of London) thinks that the current risk ‘is not due to a build-up of public debt but due to a failure to address the bias in the financial system towards the taking of excessive risk. Fundamentally the financial system hasn't significantly changed since 2007.’ Similarly, David Miles (Imperial College London) argues that: ‘The agents who are still least able to withstand shocks, given their enormous leverage, are banks.

The panel members who disagree argue that the financial system has become safer. For example, Ray Barrell (Brunel University London) writes: ‘Private debt increases in the advanced economies are less worrying now we have a better capitalised banking system than in 2007.’ And Francesco Giavazzi is confident that ‘we have the tools to address a problem if one were to arise.

Franck Portier (Toulouse School of Economics), who also disagrees, takes a step back and argues that: ‘As often when thinking in normative terms, we need to identify the market imperfections at play.’ He continues that economic agents are not ‘forced’ to hold public and private debt, except possibly banks regarding public debt. He concludes that: ‘Excess of public and private debt is mainly a consequence of this saving glut.

The role of loose monetary policy

The second question of the survey inquired into the causes of elevated debt or asset prices.

Question 2: Is the loose monetary policy of major central banks responsible for the recent increase in global leverage and/or asset values?

Sixty-one panel members answered this question. A strong majority of 62% either agree or strongly agree, 18% neither agree nor disagree and 20% disagree or strongly disagree. Leaving out the group that neither agrees nor disagrees, the majority increases to 76%. The outcome is similar when answers are weighted with self-reported confidence levels.

A frequent comment made is that increased leverage and higher asset values are a natural consequence of lower interest rates. Several panel members who agree with the statement go one step further and agree with a view well summarised by David Miles, who writes: ‘To a large extent this [higher leverage and/or asset values] was its aim [of expansionary monetary policy] because in raising asset values and leverage it raised demand.’

Several experts expand on the underlying reasoning. Stefan Gerlach (BSI Bank) explains: ‘Monetary policy, in the form of lower interest rates, works by increasing asset prices and stimulating interest-sensitive spending, in particular on private and commercial real estate. … Much of what commentators now worry about are thus the predictable effects of expansionary monetary policy – this is how monetary policy works.

Simon Wren-Lewis (University of Oxford) expands on this reasoning when he writes: ‘Asset values yes – that was the inevitable consequence of QE [quantitative easing].

In the reasoning used so far, the word ‘responsible’ in the question is interpreted as meaning ‘being caused by’. But a related interpretation is whether the recent increase in global leverage and/or asset values is the ‘responsibility’ of central banks’ monetary policy. Panel members who disagree focus on this related issue and point out that, as mentioned by Martin Ellison (University of Oxford), ‘if there are problems here then it is up to macroprudential policy to sort it out.

John Hassler (Institute for International Economic Studies, Stockholm University), who neither agrees nor disagrees, writes: ‘The major factor behind the rise in asset values and leverage is the long trend towards lower real interest rates. This trend has nothing to do with monetary policy. In the shorter run, however, central banks do affect real rates which recently has come on top of the trend.’ Other panel members echo this view.

Although not an explicit part of the question, several panel members reason that the expansionary monetary policies put in place across different countries were the right responses despite possible negative side effects. David Cobham (Heriot-Watt University) asks ‘why monetary policy has had to act in this way, and the answer is obvious: the refusal of governments (notably Schäuble's!) to use fiscal policy in an appropriate manner, which has been based on a range of incorrect arguments for austerity.’

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How the experts responded

Should we be worried?

Participant Answer Confidence level Comment
Jagjit Chadha National Institute of Economic and Social Research Strongly agree Confident
In most advanced economies, public and private debt levels are at historic peacetime highs relative to income and therefore represent fundamental risk because adjustment to less elevated levels simply may not be orderly.
Patrick Minford Cardiff Business School Disagree Confident
We have had an unprecedented period of 'loose' monetary policy in the form of interest rates at the lower bounds and massive QE. However we have also during this period have had unprecedented regulation of banks' balance sheets, notably the imposition of extremely high capital requirements. These have caused banks to shrink their balance sheets and especially to cut lending to smaller firms. Furthermore the massive QE has resulted in small rises in lending or the money supply because banks have mainly held the extra deposits in the form of reserves at central banks. This reflects their unwillingness to lend due to the regulatory capital demands. In a recent book edited by Tim Congdon, economists as diverse as Tim, Charles Goodhart and Steve Hanke have strongly criticised the regulative and other central bank/government policies that have produced these effects. What we have is not so much monetary 'looseness' as a monetary system hugely distorted by this combination of drastic regulation and massive monetary open market operations. Therefore yes there are some borrowers (including governments) who have benefited from the availability of absurdly cheap credit; and others who have been badly held back. The economy has managed a recovery but one marked by weak credit growth to small companies and poor productivity growth, possibly associated with weak competition and excessive survival among large companies.
Ethan Ilzetzki London School of Economics Agree Not confident
It is very difficult--perhaps impossible to identify in advance whether debt levels are "excessive" or asset prices are "over-inflated". Having said this, there are some signs pointing in this direction and I would err on the side of caution. UK savings rates have reached new lows, while leverage in mortgage markets is elevated again. House price growth is slowing. Global property values seem to be following a "whack a mole" pattern where house price collapes in one region (the US, Spain) seems to br followed quickly by a new "hot market" discovery (Berlin, Vienna, China).
Jonathan Portes KIng's College, London Strongly agree Very confident
It is very difficult to reconcile current levels of equity valuations and very low long term interest rates. Market measures of volatility/risk also seem implausibly low. It is of course almost impossible to call "bubbles" ex ante but some at least of the obvious warning signs are there. And it is even harder to predict precisely how a sharp reversal would manifest itself and how large any negative consequences would be - but again history suggests we should be worried
Jorge Braga de ... Nova School of Business and Economics, Lisbon Agree Very confident
Inflated prices of assets – as opposed to goods – represent a risk for the world economy to the extent that they slow down deleveraging but the greater risks come from threats to the international order and the absence of peer pressure that makes multilateral surveillance effective.
Ray Barrell Brunel University London Disagree Confident
Serious risks to the world economy can come from excess debt. In the advanced economies public debt is generally safe, and has been falling. Private debt increases in the advanced economies are less worrying now we have a better capitalised banking system than in 2007. Asset price inflation has been mainly in equity markets, and as we saw with the collapse of the dotcom bubble, this is not a massive problem when it is reversed. There are always risks, but they do not look excessive.
Simon Wren-Lewis University of Oxford Disagree Not confident
Harris Dellas University of Bern Agree Very confident
Alexander Ludwig Goethe University Agree Confident
Mike Elsby University of Edinburgh Disagree Not confident
David Cobham Heriot Watt University Agree Confident
Yes - but there are other risks too, and it's not obvious that this one dominates – certainly not enough to require immediate or severe monetary tightening.
Elias Papaioannou London Business School Agree Confident
Ricardo Reis London School of Economics and Columbia University Agree Not confident
Increases in credit seem to be predictive of financial crises, and likewise for the level of public debt and sovereign debt crises. But the associations are weak, not very stable, unclear if causal, and there are lots of false positives. As for asset prices, "inflated asset prices" is too vague, as there is some "inflated" asset price" in some market almost every day. But, if some negative shock hits the world economy, having higher debt in many cases heightens its negative impact, although stating it this way is not that useful. So, I slightly agree, but with little confidence.
John Hassler Institute for International Economic Studies (IIES), Stockholm University Agree Confident
For three decades, real save interest rates have fallen globally. The total fall is in the order of 4-percentage points and the negative trend has nothing to do with monetary policy. Lower real rates necessarily leads to higher equilibrium asset prices and larger balance sheets. Furthermore, lower real rates leads to a higher sensitivity of net worth to variations in the factors that drive fundamental asset values. Most likely this leads to higher aggregate risk. The driving force behind this is largely beyond the control of governments and central banks. What needs to be done, however, is to better allocate the risks that a low interest rate society brings with it. In many countries, young households have to bear a to large risk because of ill-functioning housing markets and underdeveloped markets for risk sharing.
Richard Portes London Business School and CEPR Neither agree nor disagree Not confident
This question is highly oversimplified - as if a journalist were putting it. If ‘inflated asset prices’ means bubbles, that’s doubtful. But there’s no doubt that neither public nor private sectors have done significant deleveraging since 2008 - except the banks, which have been forced to do so and are consequently much healthier. Stress tests suggest that banks could withstand very sharp falls in asset prices. So where are the risks? Maybe in parts of shadow banking sector. But that Too is arguable - see recent FSB statement to the contrary.
Francesco Giavazzi IGIER, Università Bocconi, Milano Disagree Not confident
I think we have the tolls to address a problem if one were to arise
Angus Armstrong National Institute of Economic and Social Research Agree Very confident
Debt burdens in most advanced countries and many developing countries are at elevated levels which, cet. par., implies higher risk. To the extent that de-leveraging has occurred, debt burdens are only back to 2006-7 levels. I don't take a great deal of comfort from this. Economies were fragile in this period and the occurance of the crisis was not orthogonal to this fact. It is also worth noting that private debt burdens in the UK are rising slightly again. Note, this is not an argument for further austerity.
Martin Ellison University of Oxford Agree Confident
Jonathan Temple University of Bristol Agree Confident
Franck Portier Toulouse School of Economics Disagree Confident
As often when thinking in normative terms, we need to identifythe market imperfections at play. Are economic agents 'forced' (directly or indirectly) to save under the form of public and private debt that would have been excessively issued? Hard to believe, except perhaps for banks that may demand too much public debt because it is considered as a safe asset by financial regulation. I believe that low interest rates (and hence high asset prices) are deeply driven by a lack of profitable opportunities of investment. Excess of public and private debt is mainly a consequence of this saving glut.
Giuseppe Bertola Università di Torino No opinion Extremely confident
David Smith Sunday Times Agree Confident
Asset markets appear to have been divorced from underlying economic realities for some time, so there are plainly risks. They are not on the scale of 2007-8 but are a source of concern.
Thorsten Beck Cass Business School Agree Very confident
There is is still a sovereign debt overhang in several Eurozone countries. There is increasing concern on UK sovereign and private debt levels given increasing uncertainty on Brexit and thus economic performance. Finally, there seems an increasing private debt accumulation in several emerging markets, which is hard to understand given currency and location of this debt.
Francesco Lippi Università di Sassari Neither agree nor disagree Confident
Question is ambiguous to me. Relative to when? Also, we could disagree forever on how to measure excessive debts....
David Bell University of Stirling Agree Confident
Michael McMahon University of Oxford Agree Confident
I agree there is "heightened risks" but stop short of thinking we are on the verge of another crisis. Debt service costs are low and a natural reaction is to build up more debt. The banks providing the credit, at least in the UK, are better capitalised and I don't think the normalisation of interest rates will take nominal rates to anything like what was the pre-crisis normal (at least in the near term).
John VanReenen London School of Economics Agree Not confident
Gianluca Benigno London School of Economics Neither agree nor disagree Confident
Sweder van Wijn... Universiteit van Amsterdam Agree Confident
In particular German banks are loaded up with german debt to the extent of almost 3 times their capital value; these holdings will crash when interest rates rise. LT interest rates going back up to 4% would trigger a 30% price drop on German banks'average 7 year maturity debt holdings. This would wipe out all capital of the entire german banking system. Yes that is a systemic risk.
Pietro Reichlin Università LUISS G. Carli Agree Confident
I see mainly a public debt problem. The countries with higher public debt are those that had the worst performance and highest volatility of the main macro variables after the great recession. Low interest rates in these countries and loose monetary policy reduce governments incentives to make fiscal consolidations and banks incentives to dispose of non performing loans. It is entirely plausible that problems may arise in the near future.
Michael Wickens Cardiff Business School & University of York Agree Not confident
Household debt has increased and savings ratios have fallen which has largely reversed what was observed immediately after the financial crisis. One reason is cheap money (see next question); another is the working of life-cycle effects through consumption smoothing as a result of the prolonged recessionary effects of the financial crisis. In addition, low bond yields caused by quantitative easing has seen rising equity prices due to portfolio substitution. As QE is unwound and interest rates are increased, equity prices could fall thereby generating increased financial risks. Increased interest rates could also cause the bankruptcy of zombie companies which are currently kept alive by cheap credit. Another risk to the world economy is the heavy indebtedness of China.
Wouter Den Haan London School of Economics Agree Confident
Debt levels are still high, some asset prices (like house prices in some countries) may be inflated, and the financial regulatory system is still far from perfect. Moreover, there are several risk factors such as Brexit. Increased growth has made the world saver. But it makes perfect sense to remain very cautious.
Andrew Mountford Royal Holloway Strongly agree Confident
As ever the question asks for a one dimensional response to a multidimensional question but from reading the financial press we do seem to be back in a similar situation to that in the leadup to 2007-8 crisis . However this is not due to a build up of public debt but due to a failure to address the bias in the financial system towards the taking of excessive risk. Fundamentally the financial system hasn't significantly changed since 2007. The Banking sector is still highly concentrated and so bank failures will have systemic effects. In the UK the banking sector is still vulnerable to a house price correction (and so interest rate hikes) as Bank business models are still reliant on mortgage lending which is about two thirds of major UK banks’ loans to UK borrowers . I also read that Eurozone banks are similarly vulnerable to interest rate rises. The only changes from 2007 stem from the increased regulation of Basel III and the Vickers report reforms in the UK. However it is difficult to have confidence in these as (i) Vickers himself felt the increased capital requirments have been watered down and in any case are subject to the same off balance sheet manipulations as before. Basel III also seems to be just more of the same (see e.g. Wikipedia criticsm) (ii) the ring fencing of retail banks in the UK may make them even more vulnerable to UK property market swings and (iii) the disciplining effect of bailinable bonds on lending behaviour is dubious at best. So its very much a case of plus c'est change https://www.reuters.com/article/us-eurozone-banks-ecb/fifty-one-euro-zone-banks-vulnerable-to-rate-shocks-ecb-says-idUSKBN1CE0KI https://www.ft.com/content/a56772c4-6554-11e7-8526-7b38dcaef614 http://www.bbc.co.uk/news/business-35573225 http://www.bankofengland.co.uk/publications/Pages/fsr/2017/jun.aspx https://www.bloomberg.com/news/articles/2017-10-03/fed-s-next-bank-cop-seen-as-icebreaker-in-basel-capital-standoff https://en.wikipedia.org/wiki/Basel_III
Evi Pappa European University institute Disagree Confident
David Miles Imperial College Neither agree nor disagree Confident
Whether debt is a problem depends on who holds it and their ability to withstand shocks (to their income or asset values). Aggregate figures on debt tell you rather little about that. The agents who are still least able to withstand shocks, given their enormous leverage, are banks. .
Morten Ravn University College London Agree Confident
Large gross asset and liability positions are a risk especially since households and firms might have got used to a low interest rate environment.
Richard Dennis University of Glasgow Agree Not confident
Jürgen von Hagen Universität Bonn Agree Confident
"Heightened risk" but not yet "high risk". There is still time to prevent a crisis, but time is running out. So, Schäuble is right to call an early warning.
Paul De Grauwe London School of Economics Agree Not confident
Yes there is such a risk but I am not sure how important it is
Costas Milas University of Liverpool Agree Confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Neither agree nor disagree Not confident
Fabrizio Coricelli Paris School of Economics Agree Confident
Lars E O Svensson Stockholm School of Economics Disagree Confident
Fabien Postel-Vinay University College London Agree Confident
Philippe Bacchetta Université de Lausanne Disagree Confident
The risk does not appear high at this stage, but I worry about complacency in financial markets.
Stefan Gerlach BSI Bank Agree Very confident
There are clear risks emanating from the very high level of debt, in particular of public debt. It is difficult to see, from a long-run historical perspective, how the debt-to-GDP ratio can be reduced to a more comfortable level. Debts were very high after the end of WW2, but melted away as a consequence of rapid growth, high and unexpected inflation, and financial repression. These factors are unlikely to play the same role now.
Antonio Fatás INSEAD, Singapore Neither agree nor disagree Very confident
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Not confident
Akos Valentinyi University of Manchester Agree Confident
Panicos Demetriades University of Leicester Agree Extremely confident
There is no doubt that both public and private debt levels remain at record levels, partly because economic growth has been sluggish and median household incomes as well as real wage growth have been squeezed since the global financial crisis. There’s also no doubt that QE has helped to keep asset order cues artificially high. As Borio says, however, we do not fully understand all the factors at play. What we do know about high levels of non performing loans in Europe, for example, compounds these concerns. Italy is a particular concern because of the lethal mix between high levels of NPLs in the banking system and public debt and because it’s big enough to cause another existential crisis in the Euro area. The way in which failing banks in the Veneto region were dealt with a few months ago doesn’t inspire much confidence in the resolution frameworks in place and more broadly the new financial architecture in Europe. Italy can ill afford to bail out more banks. I suspect that’s what’s Schäuble has at the back of his mind and I have no doubt that if he says he is concerned about these risks, they must be pretty serious ones.
Roger Farmer University of Warwick Strongly agree Extremely confident
PE values are close to all time highs. They can go up further. But they WILL eventually crash with very bad consequences.
Philip Jung University of Dortmund Agree Very confident
Jean Imbs Paris School of Economics Neither agree nor disagree Extremely confident
Alan Sutherland University of St. Andrews Agree Confident
Roel Beetsma University of Amsterdam Agree Confident
Asset prices, especially stock prices, are at a historical high relative to earnings. Bond yields extremely low at least for core Eurozone debt. We are starting to depart from the current expansionary monetary policies, which will raise risks for asset prices.
Fabio Canova BI Norwegian School of Management Disagree Confident
maybe in some countries, but overall i disagree
Gino A. Gancia CREI and Universitat Pompeu Fabra Neither agree nor disagree Confident
Robert Kollmann Université Libre de Bruxelles Strongly agree Very confident
Sean Holly Cambridge University Neither agree nor disagree Extremely confident
Mario Forni Università di Modena Disagree Confident

Is monetary policy the cause?

Participant Answer Confidence level Comment
Jagjit Chadha National Institute of Economic and Social Research Agree Very confident
Ultra low rates was adopted as a temporary response to the financial crisis shock but has become a long-lived regime in its own right that has played a significant role in driving up asset and house prices globally.
Patrick Minford Cardiff Business School Neither agree nor disagree Confident
See my answer above. Partly responsible but as part of the overall regulatory/monetary situation. Central banks can be considered generally responsible for the financial crisis and the responses to it. They permitted/encouraged a huge credit boom in the 2000s; they then brought in regulations that precipitated difficulties in the interbank market; these were not prevented by central banks from triggering the collapse of the system from Lehman on. Subsequently they have continued to over-regulate and over-buy bonds. The mess is in general due to poor central bank behaviour from 2000 onwards.
Ethan Ilzetzki London School of Economics Disagree Not confident
Low central bank rates are a consequence--not a cause--of global low real (risk-free) interest rates. The global recovey is still sluggish and central banks could and should address macroprudential risk with macroprudential policy, not interest rate policy.
Simon Wren-Lewis University of Oxford Neither agree nor disagree Confident
Asset values yes - that was the inevitable consequence of QE. It may have also encouraged additional leverage, but responsibility for leverage lies with macroprudential policy. The moment that we make interest rate/QE policy responsible for financial stability as well as inflation is the moment the consensus around assigning macro stabilisation to monetary rather than fiscal policy ends.
Ray Barrell Brunel University London Agree Confident
Asset prices must reflect the future discounted value of earnings. Low interest rates driven by loose monetary policy lead to high asset values. However, low real interest rates over the last few years in the advanced economies are not mainly the result of central bank policies, and these have contributed to high asset values. As such, high asset values may in part be sustainable if real interest rates stay low.
Jonathan Portes KIng's College, London Agree Not confident
It is likely to be a contributing factor but not necessarily main cause. Nor does it follow that tighter policy b- rather than stronger/better targeted regulation, higher capital bequirements etc - should be the policy response
Franck Portier Toulouse School of Economics Neither agree nor disagree Confident
Jordi Galí CREI, Universitat Pompeu Fabra and Barcelona GSE Agree Confident
It must be true, even if it is only part of the explanation.
Harris Dellas University of Bern Strongly agree Very confident
Alexander Ludwig Goethe University Disagree Confident
David Cobham Heriot Watt University Agree Confident
It has clearly played a role – but the question to ask is why monetary policy has had to act in this way, and the answer is obvious: the refusal of governments (notably Schäuble's!) to use fiscal policy in an appropriate manner, which has been based on a range of incorrect arguments for austerity (expansionary fiscal contractions, debt ratio threshold effects on growth, moral hazard poorly understood, etc). If fiscal policy had been used in the right way since 2009 there would have been less pressure on central banks to undertake monetary expansion (and to invent new techniques for it), economic activity would have been stronger and the debt/asset price position would have been healthier.
Mike Elsby University of Edinburgh Agree Not confident
Elias Papaioannou London Business School Agree Confident
Ricardo Reis London School of Economics and Columbia University Neither agree nor disagree Confident
There has been some great research on this topic in the last few years, and there are still many studies underway. My reading of it is that it that it is too early to tell. But I hope that in 2-3 years, I could give a confident answer to this question.
Angus Armstrong National Institute of Economic and Social Research Agree Very confident
Central banks themselves have argued that QE in part functions through rising asset prices so this hardly seems controversial. However, there is a deeper issue that conventional monetary policy also affects risk prremia. There has been some initial attempts to model spreads in central bank policy reaction functions which is welcome, but it is far from clear that risk taking can be summarised by a single metric. This creates a spil-over between monetary and financial policy which probably requires some further thought.
Richard Portes London Business School and CEPR Neither agree nor disagree Confident
‘Global leverage’ up? Not down, yes, and up in China, but where else? And is monetary policy ‘loose’ when natural real rate seems to have fallen considerably?
Francesco Giavazzi IGIER, Università Bocconi, Milano Disagree Very confident
Loose monetary policy has saved the world and is major responsible for the current widespread growth. Of course, as always in life, there are risks but the BIS should ask itself what the alternative would have been
Martin Ellison University of Oxford Disagree Confident
Whilst loose monetary policy has contributed to increased leverage and asset prices, if there are problems here then it is up to macroprudential policy to sort it out. I've never been very convinced with the "too low for too long" argument - we need to use macroprudential policy to build a stable financial architecture that doesn't explode or implode whenever the markets think monetary policy is off kilter. It's time for macropru to step up to the plate.
Jonathan Temple University of Bristol Neither agree nor disagree Not confident
David Smith Sunday Times Strongly agree Very confident
It is hard to separate rising debt and inflated asset prices from the years of loose monetary policy. The question is how markets respond to the tightening of policy, and whether that response constrains central banks.
Thorsten Beck Cass Business School Agree Very confident
It is the combination of using loose monetary policy (needed given weak growth) and NOT using macro-prudential tools sufficiently to prevent asset prices from overshooting.
Francesco Lippi Università di Sassari Agree Not confident
David Bell University of Stirling Agree Confident
Michael McMahon University of Oxford Disagree Confident
Low debt service costs play a role and hence there is a role for loose monetary policy - as Borio says "unprecedented gradual pace of monetary policy normalisation has played a role". But I don't agree monetary policy is solely responsible nor do I think I would have advocated a faster normalisation over the past years given the objective of most central banks is to maintain price stability in terms of CPI and the pressures on that front have warranted loose monetary policy.
John VanReenen London School of Economics Disagree Not confident
Gianluca Benigno London School of Economics Neither agree nor disagree Confident
Sweder van Wijn... Universiteit van Amsterdam Agree Confident
Low interest rates have encouraged banks to leverage up which in turn is leading to more demand by banks for risky assets, so yes QE is both encouraging banks to leverage up and is feeding a stockmarket rally.
Jorge Braga de ... Nova School of Business and Economics, Lisbon Agree Confident
Loose policy was also crucial to avoid further damage from the crisis in 2008 and international cooperation has been difficult even within the eurozone
Pietro Reichlin Università LUISS G. Carli Agree Confident
Loose monetary policy is a factor contributing to higher asset values. On the other hand, in the EMU, this type of policy may be the only way to compensate for the lack of a super-national fiscal policy and the inability to issue Euro bonds, i.e., safe assets.
Michael Wickens Cardiff Business School & University of York Agree Confident
The rise in equity prices is almost entirely due to loose monetary policy through low interest rates and QE. The irony is that the financial crisis was caused by the failure of asset prices to correctly price risk. Monetary policy since then still prevents risk from being correctly priced. As a result, the risk is being borne by banks, asset holders and the tax payer.
Wouter Den Haan London School of Economics Agree Confident
Yes, but has been a side product of the stimulative monetary policy. And although there is definitely some risk associated with the remaining high leverage a more restrictive monetary policy would have been much worse in terms of its negative impact on economic activity.
Andrew Mountford Royal Holloway Strongly agree Confident
Another multidimensional question asking for a one dimensional response. Yes there is certainly evidence that in the UK at least quantitative easing is fuelling a house price bubble which is a risk to the UK financial system. However increasing liquidity after the 2008 financial crisis was clearly the correct policy response in the short term. But surely it should have been possible to implement an accomodative monetary policy alongside a stricter regulatory structure that ensured that the increased liquidity was not used to fuel a speculative bubble.
John Hassler Institute for International Economic Studies (IIES), Stockholm University Neither agree nor disagree Confident
The major factor behind the rise in asset values and leverage is the long trend towards lower real interest rates. This trend has nothing to do with monetary policy. In the shorter run, however, central banks do affect real rates which recently has come on top of the trend.
Evi Pappa European University institute Disagree Confident
David Miles Imperial College Agree Very confident
To a large extent this was its aim because in raising asset values and leverage it raised demand.
Morten Ravn University College London Neither agree nor disagree Confident
loose monetary policy surely has not helped but is just one of the factors behind it.
Richard Dennis University of Glasgow Agree Confident
Jürgen von Hagen Universität Bonn Agree Very confident
Paul De Grauwe London School of Economics Agree Confident
Costas Milas University of Liverpool Agree Confident
Ugo Panizza The Graduate Institute, Geneva (HEID) Disagree Not confident
Fabrizio Coricelli Paris School of Economics Agree Confident
Lars E O Svensson Stockholm School of Economics Strongly disagree Very confident
Fabien Postel-Vinay University College London Neither agree nor disagree Not confident
Philippe Bacchetta Université de Lausanne Disagree Confident
If loose monetary policy were responsible, we should see asset values decline when normalization is announced. So far this does not seem to be the case.
Stefan Gerlach BSI Bank Agree Confident
Monetary policy, in the form of lower interest rates, works by increasing asset prices and stimulating interest-sensitive spending, in particular on private and commercial real estate. If a sharp economic contraction occurs and central banks respond by cutting interest rates sharply, we would expect to see rising stock and property prices, and rising bank lending. Much of what commentators now worry about are thus the predictable effects of expansionary monetary policy -- this is how monetary policy works. That said, rising wealth inequality is a serious problem that strikes at the heart of social cohesion, but one that is best tackled by income redistribution through the tax system. The idea that monetary policy should worry about income inequality is misguided.
Antonio Fatás INSEAD, Singapore Neither agree nor disagree Extremely confident
The interpretation of the question depends on how one interprets is because "responsible" is not well defined. Does monetary policy affect output and therefore asset prices? Of course. Is monetary policy "to blame" for high asset prices (as many argue)? No.
Gernot Müller Eberhard-Karls-Universität Tübingen Agree Very confident
Akos Valentinyi University of Manchester Strongly agree Very confident
Panicos Demetriades University of Leicester Agree Very confident
Large scale asset purchase programmes by central banks worked precisely because they artificially lowered long term interest rates, by pushing up the prices of assets purchased by CBS. The idea was economic growth will sooner or later acquire momentum in which case the higher asset price could be sustained without central bank support. But has it? At best, in my view growth remains anaemic. Thus, if CBs start unwinding QE too quickly, asset prices will start declining. I do, however, think that this is an unlikely scenario, QE will continue for as long as necessary to prevent this.
Roger Farmer University of Warwick Agree Very confident
The alternative, given what was politically feasible, would have been much worse.
Philip Jung University of Dortmund Agree Very confident
Lucio Sarno Cass Business School Agree Very confident
Jean Imbs Paris School of Economics Strongly disagree Extremely confident
Roel Beetsma University of Amsterdam Agree Confident
I answered this under 1
Alan Sutherland University of St. Andrews Agree Confident
Fabio Canova BI Norwegian School of Management Disagree Confident
Robert Kollmann Université Libre de Bruxelles Agree Confident
Loose monetary policy contributed to the recent increase in leverage and asset values. However, loose monetary policy was vital for supporting real activity, in the aftermath of the global crisis. Thus, central banks had no alternative. However, a much more aggressive tightening of financial sector regulation should have been enacted after the crisis, to improve financial stability. This would have helped to check the post-crisis rise in asset prices and leverage. Governments are to blame for this (lack of political will), not central banks.
Gino A. Gancia CREI and Universitat Pompeu Fabra Agree Confident
Sean Holly Cambridge University Agree Confident
Mario Forni Università di Modena Agree Confident