benoit cœure : the economic consequences of low interest rates public lecture by mr benoit cœure, member of the executive board of the european central bank, at the international center for monetary and banking studies, geneva, 9 october 2013. * * * i wish to thank giovanni lombardo and oreste tristani for their contributions to these remarks. i remain solely responsible for the opinions contained herein. ladies and gentlemen, it is a pleasure to be here at the icmb. in recent years, monetary policy interest rates have been reduced to exceptionally low levels. the main reason for maintaining highly accommodative monetary conditions has been to avert the risk of an economic depression and to counter deflationary pressures. at the same time, given the financial disruptions which led to what is now widely called “ the great recession ”, the reduction of interest rates has helped to offset the excessive increase in borrowing costs caused by the widening of financial spreads. from this perspective, monetary policy actions have favoured borrowers. over the same period, returns on safe financial assets have been very depressed. this has implied that on the one hand, savers in search of safe investment opportunities have found themselves having to accept extremely low rates of return – possibly negative when corrected for inflation – while on the other hand low rates have boosted asset prices and, hence, have favoured households and firms with a positive net wealth. yet, given the length of the economic slowdown and the persistence of the low interest rate environment, the media on both sides of the atlantic have been reporting on the difficult investment climate for savers. 1 the correlation between these two facts – low monetary policy interest rates and low returns on safe financial assets – may suggest a causal explanation. after all, low nominal yields on safe, long - term bonds are the result of current and expected low interest rates as well as of a term premium. it is tempting to conclude that, facing a choice between helping borrowers and supporting lenders, central banks have chosen the first group. the reduction of monetary policy interest rates would thus be seen as aiming to reduce borrowing costs for consumers and firms. savers would simply have to suffer the collateral damage from a policy aimed at other objectives. in my remarks today, i wish to argue that this conclusion is unwarranted. specifically, i will maintain that persistently low asset returns or, more generally, poor investment opportunities are simply one of the many manifestations of a deep recession. in such an environment

the influence of the payment systems on monetary policy needs to be assessed not by efficiency alone, but by reference to the velocity of money, defined as the average frequency with which a unit of money is spent in a specific time, under the assumption of a given money supply. velocity of money circulation is endogenously determined by the economic agents ’ decisions regarding liquidity holding, lending, borrowing, investing, consumption and labour. yet an increase in the efficiency of payment systems increases the velocity of money circulation exogenously. from a monetary policy point of view it becomes important to estimate the quantitative and qualitative impact of this exogenous change. an increase in the efficiency of payment systems results in an increase in the use of accounts relative to the use of banknotes and coins. less time is required for each peace of money or securities to lie unused in an account between two successive payments, leading to a shorter time period between inflow and outflow, i. e. to a higher velocity of money in bis central bankers ’ speeches circulation. the new situation is reflected in a higher turnover in markets, provided that economic agents are able to use the electronic forms of payment, are able to monitor their cash flow and are confident that the increased efficiency does not compromise security in terms of fraud. the task of the central bank is to facilitate a more efficient management of liquid funds. an efficient management of liquid resources enables economic agents to use cashless payment systems not only as a signal for their willingness to pay, but also to pay for the exact amount they owe. cash payments, in contrast, make economic agents incur costs in the form of interest foregone and increased security risks however, the increase in the velocity of money circulation is not linear. as technological advances in payment systems are seldom used at their maximum capacity, the increase in their efficiency is a gradual, rather than spasmodic process. in order to better estimate the impact of technology - driven change on the velocity of money in circulation and thereby on monetary policy, central banks thus need to use data from a variety of sources in sum, payment systems are an essential precondition for the implementation of operational monetary policy and their degree of sophistication has a direct impact on the velocity of money circulation, thereby influencing monetary policy itself turning to financial stability, there is a strong link between efficient payment systems and financial stability. financial stability implies that the financial system is robust to systemic risk, i. e. the risk that problems in one