Keyword: interest

Gunther Schnabl; Nils Sonnenberg

Abstract

Gunther Schnabl and Nils Sonnenberg show that the ECB is weakening the profitability of banks while strengthening them in a way that allows it to implement policy goals with the help of commercial banks. Moreover, with the help of the negative interest rate policy, banks from the southern euro area, along with large banks that have struggled, tend to be propped up, but at the expense of banks in the northern euro area.

Keywords: Banking and credit, Blog, central banks, euro, European Union (EU), Featured Content, Gunther Schnabl, interest, Interest rate policy, low interest rate policy, Monetary policy, Monetary Policy and Finance, Nils Sonnenberg.

Erschienen in

Austrian Institute Paper No. 40-EN/2021.

Download

via Austrian Institute

Thomas Mayer; Gunther Schnabl

Abstract

In this paper we compare the Keynesian, neoclassical and Austrian explanations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective low interest rates are attributed to ageing societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were step by step decreased by central banks to stimulate growth. This paralyzed investment and growth in the long term. We show that the ability of banks to extend credit ex nihilo and the need of time to produce capital invalidates the IS identity assumed in the Keynesian theory to hold permanently. Furthermore, we find no empirical evidence for the global savings glut and secular stagnation hypotheses. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.

Keywords: growth, interest, savings, secular stagnation.

JEL Codes: E12, E14, E32, E43.

Erschienen in

Quart J Austrian Econ (2021) 24.1:3–40.

Download

via QJAE