But independent changes in monetary policy will ultimately be reflected in inflation and, despite a decline in interest rates that’s now gone on for 20 years, inflation has remained pretty close to target, throughout the developed world (Chart 1). This suggests that, rather than causing the decline themselves, central banks have instead been accommodating a deeper downward trend in the “natural” or “equilibrium” rate of interest. That is not a trivial matter: if they had failed to track this trend, policy would have been too tight and inflation and output too low. And although stocks performed well through the early part of that decline, for much of it they’ve not done so. Chart 2 plots the yield – inversely related to the price – on indexed gilts and UK equities. Through the 1990s these two markets tended to move together and, in price terms, generally upwards. Since around 2001, however, their yields have diverged. Equities have significantly underperformed bonds. This suggests that, over that past decade or so, the forces depressing the natural rate of interest have also been increasing the extra premium required of risky assets. What I want to do today is say something about the causes of these trends and (in only the broadest possible terms) their implications for the distribution of wealth and income. None of this will be particularly novel.
10  BIS central bankers’ speeches  Bernanke B., 2005, “The Global Saving Glut and the U.S. Current Account Deficit”, Remarks at the Sandridge Lecture, Virginia Association of Economists. Broadbent B., 2012, “Costly capital and the risk of rare disasters”, speech given At Bloomberg, London, http://www.bankofengland.co.uk/publications/Documents/speeches/ 2012/speech581.pdf Bunn P. and M Rostom, 2014, “Household debt and spending”, Bank of England Quarterly Bulletin No. 304. Eggertson G. and P Krugman, 2012, “Debt deleveraging and the liquidity trap: a FisherMinsky-Koo approach”, The Quarterly Journal of Economics (2012), 1469–1513. doi:10.1093/qje/qjs023. Elsby M, B Hobijn and A Sahin, 2013, “The decline of the US Labour Share”, Brookings Papers on Economic Activity, Fall 2013. Friedman M. and A. J. Schwartz, 1963, “A monetary history of the United States 1867–1960”, National Bureau of Economic Research Joyce M., N. McLaren and C. Young, 2012, “Quantitative easing in the United Kingdom: evidence from financial markets on QE1 and QE2”, Oxford Review of Economic Policy, Volume 28, No. 4, pp. 671–701. Karabarbounis L and B Neiman, 2013, “The global decline of the labor share”, Quarterly Journal of Economics, 129(1), 61–103, February 2014. Keynes J. M., 1930, “A treatise on money”, New York, Harcourt, Brace and company. Miles, D., 2014, “The transition to new normal for monetary policy”, Speech given at Mile End Group, Queen Mary College in London and available at http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech707.pdf Woodford M., 2003, “Interest and prices”, Princeton University Press. BIS central bankers’ speeches  11