interest rates

Textbook Teaching in Macro- and Monetary Economics

Published by Anonymous (not verified) on Wed, 11/12/2019 - 1:57am in

An interview from Rethinking Economics:

Andrea, what is your experience with using textbooks when teaching macro and monetary economics?

I have long been teaching undergraduate courses in macro and monetary economics, and I always found the most popular textbooks only partially helpful. Hence, in those courses where I still have a textbook, I always complement the main text with a reading list and my own lecture notes.

Do you feel this position is shared by other economics instructors?

Read more on Rethinking Economics

Presentation on Public Spending and Debt

Published by Anonymous (not verified) on Wed, 06/11/2019 - 8:47am in

I was in DC today at an event for legislative staffers organized by the Congressional Progressive Caucus, on fiscal policy and government debt. For anyone interested, the slides I used for my presentation are below.

fiscal policy slides for 11-5-19


The CBO Just Handed Us Two Trillion Dollars

Published by Anonymous (not verified) on Tue, 22/10/2019 - 12:19pm in

Anyone who follows the DC budget game at all knows that the Congressional Budget Office (CBO) is supposed to be its referee. Any proposal that involves new spending or revenue is scored by the CBO for its impact on the federal debt over the next ten years. That score normally sets the terms on which the proposal will be debated and voted on. This ritual is sufficiently established that most spending proposals are described in terms of their cost over the next ten years – the CBO’s scoring window.

The CBO doesn’t only assess individual bills, it also gives a baseline, producing regular forecasts of major economic variables and the path of the debt under current policy. In a sense, these forecasts are the playing field on which budget proposals compete. So it ought to be a big deal when the CBO changes the shape of the field.

In their most recent 10-year budget and economic forecast, the CBO made a big change, reducing their long-run forecast of the interest rate on government bonds by almost a full percentage point, from 3.7 to 2.9. (See Table 2.6 here.)

Most directly, the new, lower interest rate reduces expected debt payments over the next decade by $2.2 trillion. It also significantly reduces the expected debt-GDP ratio. Under the assumptions the CBO was using at the start of this year, the debt ratio under existing policy would reach 120 percent by 2040. Using the new interest rate assumption, it reaches only 106 percent. With one change of assumptions, a third of the long-run rise in the federal debt just disappeared.

Debt-GDP Ratio with CBO Interest Forecasts of January vs August 2019

While this downward revision is exceptionally large, it’s hardly the first time the CBO has adjusted its interest rate forecasts. In April 2018, they raised their estimate of the long-run rate on 10-year bonds from 3.1 percnet to 3.8 percent. But that upward move is an exception; for most of the past decade, the CBO has been steadily adjusting its interest rate frecasts downward, adapting — like most other macroeconomic forecasters — to the failure of the economy to return to pre-recession trends. As recently as February 2014, they were predicting a long-run rate of 5 percent. And it’s likely the interest-rate forecast will continue to decline; the current 10-year Treasury rate is less than 1.8 percent.

The newest forecast was released in August, and as far as I can tell the change in the interest-rate assumption has gotten almost no attention in the two months since then. But it really should.

At the very least, this means that anyone arguing that federal debt is a climate-change-level threat to humanity needs to update their talking points. The claim that federal debt “will be close to 150% of GDP by 2050” is, as of August, not even close to correct. With the new interest assumptions, the figure is less than 120 percent.

To be fair, an argument that doesn’t go beyond “oooh, big number, scary” isn’t likely to be much affected by this revision. But the new interest estimate has broader implications.

If the term “fiscal space” means anything, lower expected interest rates have to mean that there is more of it. That $2 trillion in interest savings the new CBO estimate has handed us, could presumably be used for something else. As a downpayment on single-payer health coverage, say, or as public investment in decarbonization as part of a Green New Deal. Whatever spending we think most urgent or politically practical, we could borrow an extra percent of GDP or so a year to pay for it, and leave the long-term debt picture looking no worse than before.

Whatever level of federal spending you thought would keep the debt on a reasonable path a year ago, you should think that number is $2 trillion higher today. 

To be clear, CBO scoring doesn’t actually work this way. Budget proposals are evaluated relative to the baseline, wherever that happens to be. So the change in the interest assumption will have only a marginal effect on the score for individual bills. But if there is any rational content to the CBO scoring ritual, it has to involve some sort of judgement about what level of debt is reasonable, relative to GDP. If you take CBO debt forecasts seriously – as almost everyone in the policy world at least claims to – then lower interest rates mean more space for new borrowing.

Lower future interest rates also have  implications for stabilization policy. They mean that in the next recession, whenever it comes, there will be even less space for the Federal Reserve to lower rates to boost demand, and a correspondingly greater need for fiscal policy – a point that, fortunately, members of the House Budget Committee seem to understand.

There’s one more, even broader, implication of the new forecast. What does it mean that the CBO keeps revising its forecasts of future interest rates downward, even as federal debt itself continues to rise?  Obviously there is not the tight relationship between a high debt-GDP ratio and rising interest rates that austerity-promoting economists like to predict. Which should raise a question for anyone interested in macroeconomic policy or public budgets: If high federal debt doesn’t have any reliable effect on interest rates, then what exactly is its economic cost supposed to be?


(Cross-posted from the Roosevelt Institute blog.)


Trudeau’s proposed speculation tax

Published by Anonymous (not verified) on Thu, 26/09/2019 - 11:45am in

I’ve written a blog post about the Trudeau Liberals’ recently-proposed speculation tax on residential real estate owned by non-resident, non-Canadians.

The full blog post can be accessed here.

Trudeau’s proposed speculation tax

Published by Anonymous (not verified) on Thu, 26/09/2019 - 11:45am in

I’ve written a blog post about the Trudeau Liberals’ recently-proposed speculation tax on residential real estate owned by non-resident, non-Canadians.

The full blog post can be accessed here.

Yield curve weirdness

Published by Anonymous (not verified) on Mon, 22/07/2019 - 4:40am in

Yield curves have gone mad. Negative yields are everywhere, from AAA-rated government bonds to corporate junk. Most developed countries have inverted yield curves, and a fair few developing countries do too:

(chart from

Negative yields and widespread yield curve inversion, particularly though not exclusively on safe assets. To (mis)quote a famous pink blog, this is nuts, but everyone is pretending there will be no crash.

Here, for your enjoyment, is an à la carte selection of the most lunatic government yield curves. You can find lots more here.

Exhibit 1: Switzerland.

Negative yield already extends beyond 30 years, and markets are pricing in further interest rate cuts and/or QE, or indeed anything to stop the Swiss franc appreciating as scared investors pile into CHF-denominated assets. Hence the curve inversion.

Exhibit 2: Denmark.

Every Danish government bond currently circulating in the market is trading at a negative yield. And the inverted curve tells us that markets are pricing in further interest rate cuts, most likely to hold the ERM II peg when the ECB cuts rates and re-starts QE. (Yes, it's when, not if  - see Exhibit 3)

Exhibit 3: the Eurozone

Eurozone aggregated government yield curves as at 18th July 2019 (chart from the ECB):

The solid curve shows us that investors will pay Eurozone goverments with triple-A ratings to borrow for 15 years or more. Here is the Netherlands, for example:

So far, so weird. The dashed curve shows us that investors will even pay Eurozone governments with much lower ratings to borrow for a few years. Here is Portugal's yield curve:

Admittedly, the yield is depressed by ECB QE, but it is still ridiculously low for a triple-B rated sovereign.

Even more weirdly, Greek bonds are trading at only 1-3%:

Greece, you may recall, defaulted on its debt to the IMF in 2015, and its private sector debt was coercively restructured in 2012. And Greece wasn't even included in the ECB's QE programme. This is totally nuts.

Returning to the Eurozone aggregate curves, the 0.5% negative yield at the short end of the "all bonds" curve suggests that markets expect the ECB to cut the deposit rate further into negative territory. And the fact that the AAA curve is inverted, but the "all bonds" curve is not, is in my view a clear indication that markets expect the ECB to re-start QE. Though why on earth the ECB should help Germany and the Netherlands to borrow at negative rates is beyond me. There is no evidence that these countries would use that opportunity to borrow more to invest. Appeals from central bankers and the IMF for them to relax their unhelpful fiscal tightness are falling on deaf political ears. They are determinedly running fiscal surpluses and reducing debt issuance at all maturities. All ECB QE would do is help them reduce their debt even more quickly. This is not remotely productive.

Admittedly, ECB QE does reduce yields on periphery bonds, which helps make the debt of countries like Portugal more affordable. But Portugal can already borrow at negative rates for five years. What on earth would be the point of depressing its yields even more?

What is really needed is for the Eurozone to end its over-restrictive deficit/GDP and debt/GDP limits, which force governments to undertake pro-cyclical fiscal consolidation and sacrifice much-needed investment. Alternatively - or better, simultaneously - create a Eurozone-wide "safe asset" that can be sold to investors, and use the proceeds to pay for the investment that governments cannot or will not undertake. But we seem a very long way away from either of these at the moment.

If expansionary fiscal policy continues to be notably absent in the Eurozone, could the ECB do anything to relieve the drought other than rate cuts and bond purchases? Of course it could. It could buy corporate bonds and equities - though it is unclear why the ECB should subsidise European corporations, if Eurozone governments can't. Alternatively, it could transfer money equally to households all over the Eurozone, which in my view is a much better idea. But we seem a very long way away from anyone at the ECB seriously considering helicopter money. Apparently they would rather experiment with wholly untried negative rates and even more distortionary QE than give people money. Some unconventional monetary tools are much more equal than others.

Exhibit 4: the U.K.

Yeah, I know, Brexit. Actually I think this is the only reason the yield curve is above zero despite its short-end inversion. If it weren't for Brexit, the UK would be sliding into negativity like the rest of Europe. Brexit raises sovereign risk and hence gilt yields. I am not sure this is anything to be proud of. I also don't think the inversion has much to do with Brexit. It seems of a piece with the general trend in developed countries.

Exhibit 5: Japan

Gone are the days when Japan was the poster child for yield curve weirdness. This looks almost normal compared to European curves:

But Japan is now the poster child for Yield Curve Control. Hence the flat yield curve. It's a feature, not a bug. The slight inversion suggests that more monetary easing is on its way. No-one seems that bothered, frankly. Japan is....negative. Everyone knows that. It's normal.

Exhibit 6: the U.S.

Am I the only person who thinks it is completely insane that the 10-year US Treasury yields the same as the 10-year Greek government bond?

Anyway, just look at that inversion. The Fed is way out of line with other central banks. The dollar is soaring and the President is cross. Surely the Fed will cut rates any day now.

And now we move on to the real weirdness.   

Exhibit 7: Hong Kong

Well, the short-end spike could indicate a liquidity shortfall due to a short squeeze, I suppose. But even without that, the yield curve is predicting lower rates well into the future. Global trading gloom, perhaps. Or uncertainty about Hong Kong's future?

And everyone's relief, yield curves are behaving completely normally for some countries:

Exhibit 8: Egypt

Fully inverted. Likewise for Mexico, Argentina, Turkey and Venezuela. It's nice to know that yield curves can still flag up basket cases. Well, developing country ones, anyway.

But Western markets have now become the negative-carry universe that some of us predicted years ago. And the yield curve inversions go hand-in-hand with this. We do not fully understand how negative rates work, but I have long thought that once fully negative yield curves become "normal", so too will yield curve inversions. Those who want to adopt negative-rate policy as a monetary stimulus tend to assume that people will behave in the same way when rates are negative as they do when they are positive. But if, as I think, negative rates create a distorted mirror image of our familiar positive-rate world, I would expect that people's response to them would similarly be a distorted mirror image of their present behaviour. If so, then the longer negative yields persist, the more inverted yield curves will become.

Does this necessarily mean there will be a recession? Possibly. We are not yet sufficiently deep into negative rates for yield curve inversion to be "normal". But eventually, if we continue on our present trajectory, a positive-sloping yield curve will become the recession warning for most Western countries. By then, the weird transformation of our financial system that is already under way will be largely complete. No doubt this will be music to the ears of those who hate banks, but I remain unconvinced that it would be any better for undergoing such a sea-change. It could conceivably be a lot worse. Be careful what you wish for.

Related reading:

Yup, negative rates were a really bad idea - FT Alphaville
When governments become banks
Weird is normal

Do mortgage repayments drop with the cash rate?

Published by Anonymous (not verified) on Mon, 08/07/2019 - 9:47am in

 "What happened to the narrative?" "The statistics kicked in!"

Following last week’s cut to the Reserve Bank’s cash rate, Glenn shares what the Census tells us about the relationship between a cut in interest rates and mortgage repayments.

If you need to better understand the relationship between incomes and house prices in your area, you may like to learn more about – our new tool for understanding housing supply, demand and affordability in your local government area.

Last Tuesday, The Reserve Bank cut official cash rates to 1.0% – the lowest on record, following a cut in June.

They had sat at 1.5% for a long time. And for Census watchers like me, it’s particularly interesting, because the Reserve Bank had left interest rates on hold prior to that, for almost 3 years. In fact, the last cut in interest rates before the current set was in August 2016 – the month of the last Census.

This followed a precipitous drop between 2011 and 2016. In fact, every move the RBA has made since 2010 has been a cut – we haven’t seen a rise in official interest rates since then (the banks tend to do their own thing sometimes though and they may have raised rates independently on some loans).

This chart, courtesy of the RBA itself, shows the change in the cash rate over the last 30 years (does anyone remember 17.5% in 1990?!!)

The period which ended in June was the longest period with interest rates on hold on this chart. But before that, we had the 5-year Census period from 2011 to 2016, when interest rates fell – the cash rate declining from 4.75% to 1.5% over 3 years – a 3.25% reduction. Now I know the banks didn’t pass on all of this, but home loan rates were much lower in 2016 than they were in 2011.

The Census records how much people pay on their mortgage – we show this in all of our community profiles. The interesting thing is that from 2011 to 2016, mortgage repayments were almost the same, across Australia – showing only a very minor decline in some places and small increases in others. Nationally, monthly mortgage payments declined from $1,800 to $1,755 per week.

This is a table by state I first published in 2017 in this article.

Mortgage repayments, by State – 2011 vs 2016 Census


New South Wales
-$      7

 $    28

 $ 1,733
-$ 117

South Australia
-$      9

Western Australia
 $    43

 $     –

Northern Territory
 $  113

Australian Capital Territory
-$ 109

So if mortgage repayments didn’t go down over this time, there can really be two main reasons for this

  1. People are paying more for houses: prices certainly went up –  so the amount of mortgages for first home buyers has tended to increase over time. But many people upgrade, or are paying off an older mortgage so their mortgage doesn’t go up when their house value goes up. So for the majority of the population, not buying in at the increasing prices, their mortgages should go down, right?
  2. People continue to pay off a higher amount: (really set at the amount they can afford to pay) and when interest rates fall, they just pay off more of the principal.

I think the reality is probably a combination of the two – prices going up, so people borrowing more at lower interest rates, while existing mortgagors are continuing to pay a larger amount.

In fact, there is evidence for the latter point from the RBA – the following chart confirms that homeowners increased their payment of loan principals between 2011 and 2016. So, while interest payments went down as a share of income, total payments still hovered around 12% of income.

There is plenty of commentary around this – and financial advisors such as Scott Pape are advising people to do just that. He says that people are not taking advantage of low interest rates to pay off their loans sooner. I think, based on the Census numbers (and those from the RBA) above, they are doing exactly that!

It’s worth remembering that the Census records what people actually pay on their mortgage, not their minimum loan repayment or the amount of the loan.

For a while, I thought we might get to the next Census with no change in interest rates, but they have now fallen further. Anyone think they will rise again by August 2021?

Another byproduct of the lower interest rates in 2016 was a slightly lower rate of mortgage stress nationally (as incomes went up in that time). It declined from 10.6% to 9.9% of households from 2011 to 2016. Overall housing stress went up, though, because rental stress increased from 25% to 28% of renting households.

Our new tool,, helps you look at the level of housing stress in your area, based on new measures related to percentages of median income, adopted by several State Governments. It also tracks interest rates, incomes in your area, building approvals and the type of housing occupied by different households – as well as how many sales and rentals in your area are actually affordable to people at different income levels. See in action here, or contact our housing team for more information about having this tool made available in your council area (please note, is currently only available for as a tool for local government. If you’re from the private sector or a not-for-profit, check out our other publicly-available resources here).