Keith Kuester, the University of Bonn: The dark side of low(ering) interest rates
Department seminar. Keith Kuester is a Professor at the University of Bonn. He will present a paper entitled "The dark side of low(ering) interest rates", co-authored by Pablo Guerrón-Quintana.
Keith Kuester. Photo: the University of Bonn
Retirement benefits in industrialized countries have come under great pressure. How should one conduct monetary policy in this scenario? Do low interest rates necessarily stimulate demand? The paper builds a New Keynesian overlapping generations model. The “standard” monetary transmission obtains whenever public pensions are sufficiently generous. Below a critical level of government-provided pensions, however, low interest rates can show their darker side: lower interest rates may turn into the cause of a recession rather than supporting economic activity. This is more likely if households do not want to substitute intertemporally, or if they cannot. For example, because the young are borrowing-constrained and the constraints do not ease sufficiently.
Host: Hans Holter