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In the fall of 1999, the recovery in Euroland is back on track. The turnaround was caused by the improvement in the world economy. After exports had been depressed in the past winter due to the weak demand in the crisis countries particularly in Asia, the impulses from abroad have picked up again. Furthermore, monetary policy has been expansionary, especially after the reduction of key interest rates in April this year. All in all, the upswing will gain momentum and will continue in the year 2000. In this paper, rules for monetary policy which are being discussed in the literature are used to gauge the stance of monetary policy. The conclusion is that interest rates will have to be raised if the reference path for money shall not be exceeded and if the target for inflation shall be achieved. Furthermore, the differences in growth rates of output across Euroland's economies are analyzed; it is found that there has been no significant convergence of income levels during the past decade. Finally, it is analyzed why inflation rates have differed in recent years. The main reason appears to be that the prices for nontradables in the various countries show different rates of change over time. Since such differences can also be expected for the future, inflation rates will not be equal, i.e., there will also be changes in real exchange rates in the monetary union. However, there is no reason for monetary policy to be concerned about this.

The sustained rise in US current account deficits, the stubborn decline in long-run real rates, and the rise in US assets in global portfolios appear as anomalies from the perspective of conventional models. This paper rationalizes these facts as an equilibrium outcome when different regions of the world differ in their capacity to generate financial assets from real investments. Extensions of the basic model generate exchange rate and foreign direct investment excess returns broadly consistent with the recent trends in these variables. The framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment. (JEL: E44, F21, F31, F32)

enth.

We analyse the impact of standard and non-standard monetary policy on bank profitability. We use both proprietary and commercial data on individual euro area bank balance-sheets and market prices. Our results show that a monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Accommodative monetary conditions asymmetrically affect the main components of bank profitability, with a positive impact on loan loss provisions and non-interest income offsetting the negative one on net interest income. A protracted period of low monetary rates has a negative effect on profits that, however, only materializes after a long time period and is counterbalanced by improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate period improve bank stock prices and CDS. ; L.P. acknowledges the financial support from the Spanish Ministry of Economy, Industry and Competitiveness [Grant ECO2015-68136-P] and FEDER, UE and from the European Research Council Grant [project 648398].

ABSTRACTThis article discusses macroeconomic policies in a low interest rate environment, the central theme of the 2017 edition of the Melbourne Institute Macroeconomic Policy Meeting. After reviewing possible causes of the decline in interest rates observed since the 1990s, we present and discuss some of the challenges that monetary and fiscal policy face in a 'new normal' environment characterised by a real natural interest rate close to zero. Proposals by leading researchers on how to operate in such an environment are presented and discussed. We conclude by outlining some research questions that are highly relevant from a policy perspective.