Yesterday I delivered a speech with the title “No longer convenient? Safe asset abundance and r*” at the @bankofengland.bsky.social's #2025BEARconference. Let me summarise the main messages in a 🧵. 1/16 - ThreadSky

isabelschnabel.bsky.social • 15 days ago

Yesterday I delivered a speech with the title “No longer convenient? Safe asset abundance and r*” at the @bankofengland.bsky.social's #2025BEARconference. Let me summarise the main messages in a 🧵. 1/16

Reposted from European Central Bank

Moving from a global savings to a global bond glut is putting upward pressure on the real equilibrium rate, says Executive Board member @isabelschnabel.bsky.social. Monetary policy may be less restrictive and balance sheet policies less effective than thought.

www.ecb.europa.eu/press/key/da...

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isabelschnabel.bsky.social•15 days ago

The speech starts from the observation that the sharp rise in euro area nominal bond yields over the past three years was driven by a rise in real yields rather than by a change in inflation compensation. 2/16

isabelschnabel.bsky.social•15 days ago

Euro area real long-term rates are substantially higher today than during most of the post-2008 period. This is not just driven by the tightening of monetary policy but also by higher real forward rates – a common proxy of the natural rate of interest, r*. 3/16

isabelschnabel.bsky.social•15 days ago

The same dynamics are reflected in model-based estimates of r*. According to an analysis by ECB economists, r* in the euro area has increased even more than forward rates. While it is difficult to pin down the level of r*, the directional change is unambiguously upwards. 4/16

isabelschnabel.bsky.social•15 days ago

Hence, we are unlikely to return to the pre-pandemic macroeconomic environment in which central banks had to bring real rates into deeply negative territory to deliver on their price stability mandate. The nature of the inflation process is likely to have changed lastingly. 5/16

isabelschnabel.bsky.social•15 days ago

Yet, the persistent rise in real rates poses a conundrum in the euro area as supply-side factors like productivity growth do not speak in favour of a higher r*. However, the link between the structural factors driving potential growth and r* has been shown not to be robust. 6/16

isabelschnabel.bsky.social•15 days ago

Research by Fed economists shows that incorporating the convenience yield – the yield that investors are willing to forgo in equilibrium for liquidity and safety services of government bonds – into the Laubach-Williams model significantly improves the explanatory power of the model. 7/16

zavcorin.bsky.social•15 days ago

Great thread, thanks very insightful

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