In Baranova, Y., Coen, J., Lowe, P., Noss, J., & Silvestri, L. Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds. Bank of England Financial Stability Paper No. 42, July 2017, 3-6. Bridges, J., Jackson, C., & McGregor, D. (2017). Down in the slumps: the role of credit in five decades of recessions. Bank of England Staff Working Paper No. 659. Brooke, M., Bush, O., Edwards, R., Ellis, J., Francis, B., Harimohan, R., Neiss, K. & Siegert C. (2015). Measuring the macroeconomic costs and benefits of higher UK bank capital requirements. Bank of England Financial Stability Paper No. 35, December 2015. Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007–2008. The Journal of economic perspectives, 23(1), 77100. Brunnermeier, M. K., & Sannikov, Y. (2014). A macroeconomic model with a financial sector. The American Economic Review, 104(2), 379-421. Brunnermeier, M. K., Eisenbach, T. M., & Sannikov, Y. (2012). Macroeconomics with financial frictions: A survey. National Bureau of Economic Research Working Paper 18102. Bunn, P. & Rostom, M. (2015). Household debt and spending in the United Kingdom. Bank of England Staff Working Paper No. 554. Calomiris, C. W. (2017). Reforming Financial Regulation After Dodd-Frank. Manhattan Institute. Carlson, M., Shan, H., & Warusawitharana, M. (2013). Capital ratios and bank lending: A matched bank approach. Journal of Financial Intermediation, 22(4), 663-687. Carney, M. (2017a). The Promise of FinTech – Something New Under the Sun?
I have always been uncomfortable with this usage of a 2 percent equilibrium real rate assumption because it ignores the possibility that the equilibrium rate changes in response to technology shocks or in response to changes in how monetary policy is transmitted via the financial system to the real economy. For example, in the late 1990s, when trend productivity growth shifted upward, it seemed logical that this would also push up the equilibrium shortterm real interest rate. That is because higher productivity growth, by raising the return on capital, spurs greater investment, thereby driving the equilibrium rate higher. Similarly, if stock prices rose sharply in response to higher productivity growth, this should also lead to a higher equilibrium real rate through the effect of greater stock market wealth on consumer spending. Higher stock prices meant that financial conditions were easier. This needed to be offset by a somewhat higher fed funds rate target. Financial conditions also appear to have become more important in terms of their influence on business cycles. On the one hand, the fed funds rate has been more stable and the range of the fed funds rate over the cycle has been smaller. However, on the other hand, relative to what has happened to the fed funds rate target, financial conditions have become more volatile.