Schweizerische Nationalbank · SIX:SNBN
Schweizerische Nationalbank — Investor Presentation (September 2021)
35 slides from Schweizerische Nationalbank's investor presentation, September 2021
Slide 1: Monetary Policy in an Era of High Debt
Monetary Policy in an Era of High Debt Carmen M. Reinhart World Bank and Harvard University Karl Brunner Distinguished Lecture September 2021
Slide 2: Inflation and Interest rates: A global historical perspective
Inflation and Interest rates: A global historical perspective Reinhart
Slide 3: Global median inflation is about 2.5% in 2021
While there are some disturbing developments unfolding, global median inflation (unweighted) is ≈ 2.5% in 2021. Based on a new encompassing dataset, this is similar to the late 1950s and 1960s. World median annual inflation rates: 1900‐2021 (in percent) 25 20 15 10 5 0 ‐5 ‐10 ‐15 1900 1905 1910 1915
Slide 4: Major deflations and hyperinflation: World, 1900-2021
After a mild decade, hyperinflation (or very high inflation) has re-surfaced selectively. Major deflations have been extremely rare since WWII. The Extremes‐‐Major Deflations and Hyperinflation: World, 1900‐2021 Percent of countries with deflations greater than 5 percent and number of countries with
Slide 5: Unprecedented cross-country convergence in annual inflation rates
For advanced economies (1946-2021), there has been an unprecedented cross-country convergence in annual inflation rates 14 30 12 25 Median annual inflation rate 10 (solid line, left axis) 20 8 Percent 15 6 Standard deviation of annual inflation 10 (bars, right axis) 4 5Unprecedented 2 convergence in
Slide 6: Duration of negative real interest rates surpasses the 1970s
The duration of negative real interest rates post GFC and now COVID‐19 surpasses the negative rate episode of the 1970s World financial centers: Nominal and real ex‐post short‐term interest rates, 1900‐2021:7 20 15 Nominal 10 5 Percent 0 ‐5 ‐10 ‐15 ‐20 Real ‐25 1900 1905 1910 1915 1920 1925 1930 193
Slide 7: Share of countries with negative ex-post bond yields
Share of countries with negative ex‐post bond yields: Advanced economies, 1945‐2021 (left scale, tan bars) (right scale, red bars) Share of Number of countries with Financial Repression (FR) era, part I: countries with negative real rates negative real rates 100 Negative (or low) real rates primaril
Slide 8: Share of countries with negative real short-term interest rates
Share of countries with negative real short- term interest rates in advanced economies (left scale, light bars) (right scale, red bars) Share of Number of countries with countries with negative real rates negative real rates 100 18 90 16 80 14 70 12 60 10 50 8 40 6 30 4 20 10 2 0 0 1945 1950 1955 19
Slide 9: Frequency distribution of long-term bond yields across three eras
Frequency distribution of long-term bond yields across three eras: Advanced Economies, 1945- 2021 Percent of 1946‐1979 1980‐2007 2008‐2021 25 observations Real Interest rate on Treasury bonds Share of obsevations at or below: Post‐financial liberalization, 20 1945‐1979 1980‐2007 2008‐2021 pre GFC ‐1
Slide 10: Frequency distribution of short-term interest rates across three eras
Frequency distribution of short‐term interest rates across three eras: Advanced Economies, 1945‐2021 1946‐1979 1980‐2007 2008‐2021 40 Real Interest rate on T‐bills Short rates 35 Share of obsevations at or below: (≈ policy 1945‐1979 1980‐20072008‐2021:7 ‐1 percent 31.9 5.0 31.8 rates) have 30 0 46.6
Slide 11: Trends in central banking and government debt after the GFC and COVID-19
Some trends in central banking and government debt after the GFC and COVID‐19 Focus on the CB footprint in financial markets and the sovereign‐central bank nexus. Reinhart
Slide 12: Measures of the footprint of the Federal Reserve
Measures of the footprint of the Federal Reserve, 1945‐2021Q1 US Marketable Treasury Securities and US Marketable Treasury Securities and GSEs held by the Federal Reserve as a % GSEs held by the Federal Reserve as a % of outstanding: 1945‐2021Q1 of US GDP: 1945‐2021Q1 30.0 30.0 25.0 GSE holdings, 25
Slide 13: Foreign CBs are also major
Foreign CBs are also major. The combined effect of domestic and official players calls into question to what extent interest rates remain “market‐determined” Reinhart
Slide 14: The two-step ratchet: expanding role of central banks
The two‐step ratchet: the expanding role of central banks in Advanced economies (AEs), 2000‐2020 Central bank holdings of government debt as a % of outstanding debt stock 2000‐2007 2008‐2019 2020, eop Stage 2:The 45 COVID‐19 40 response 35 Stage 1: GFC and 30 its aftermath 25 20 15 10 5 0 Note: GSE
Slide 15: Surge in government debt held by CBs not universal
The surge in government debt held by CBs is a dominant but not universal trend across AEs Central bank holdings of government debt as a % of outstanding debt stock 2020, eop 2008‐2019 2000‐2007 Switzerland Singapore More akin to “classic” currency Norway Israel Boards, some central banks Iceland hav
Slide 16: CB holdings of government debt as % of GDP; Switzerland
CB holdings of government debt as a % of GDP, 2000‐2020 displays the same two‐step upward ratchet. In Switzerland, the CB’s expanding footprint is evident in base money (% GDP); which has gone from an average of ≈ 8% over 2000‐2007 to over 100% in 2020 Switzerland: Montary Base 2000‐2020 100 2000‐20
Slide 17: Emerging market CB holdings of government debt
Among EM central banks, there is no generalized upward trend (or ratchet effect) in government debt holdings since the GFC and only selectively since the onset of COVID‐19 CB holdings of government debt as % of outstanding debt stock 2000‐2019 2020, eop The first group shows an increase in This thir
Slide 18: EM CB holdings scaled by GDP
When scaled by GDP (rather than the stock of debt), the list of EM CBs with a small footprint is longer. 2000‐2019 2020, eop Average annual inflation 50 for this group over 2000‐2020 45 Is 10.2% 40 35 30 25 20 15 10 5 0 Pakistan Hungary Tunisia Belize Jamaica Indonesia Lebanon China South Africa Uru
Slide 19: Reliance on domestic banks for funding the government
In the aftermath of the GFC in countries with limited capital market access, the reliance on domestic banks for funding the government rose significantly.* It facilitates short‐term funding but sets the stage for a “doom loop” 18 Percent 20 Percent Italy Greece 16 18 14 The debt is transferred To th
Slide 20: Public debt as a % of GDP: Advanced Economies, 1900-2021
Public debt as a % of GDP: Advanced Economies, 120 1900-2021 Surges in government % of GDP debt have often set the stage for financial repression How were WWI and How were WWII Depression debts debts reduced? 100 Axis: default and financial reduced? advanced and emerging repression/inflation economi
Slide 21: EMDE debt levels and debt intolerance
While EMDE debt levels are well below AEs, many of these countries are debt intolerant and have encountered debt crises at lower levels than those in prevailing in 2021. Unweighted average, 46 EMDEs 1900‐2021 Sources: IMF, World Economic Outlook and Reinhart and Rogoff (2009, 2011) and sources cited
Slide 22: Alternative approaches to debt reduction
Alternative approaches to debt reduction Throughout history, debt/GDP has been reduced by: (i) economic growth; (ii) fiscal adjustment/austerity; (iii) explicit default or restructuring; (iv) a sudden surprise burst in inflation; and (v) a steady dosage of financial repression. Options (iv) and (v)
Slide 23: Financial Repression (FR) and Financial Repression Noveau (FRN), 2008-present
Financial Repression (FR) and Financial Repression Noveau (FRN), 2008‐present Defining features of FR; regulation and macroprudential policies with a FR character Reinhart
Slide 24: Financial Repression
Financial Repression The term financial repression (FR) was introduced by Edward Shaw (1973) and Ronald McKinnon (1973). FR became a way of describing emerging market financial systems prior to the widespread financial liberalization that began in the 1980s (see Agenor and Montiel, 2008, Giovannini
Slide 25: Financial repression usually involves a combination of features
Financial repression usually involves a combination of: (i) a large footprint of the official sector in financial markets; (ii) closer links between the government and the central bank (CB) ; (iii) heavier regulation of the financial sector; (iv) sustained low or negative real interest rates; (v) ca
Slide 26: FR is an opaque tax
FR is an opaque tax • FR is a tax on bondholders and, more generally savers • No legislation or public vote is required • The tax on financial intermediaries is usually passed on to depositors and borrowers • As such, FR has distributional consequences (not addressed here) • Much of the literature F
Slide 27: Other features of FR
Other features of FR Directed credit has often accompanied FR. This includes Financial repression was historically directed lending to the government associated with relatively high sometimes accompanied by: reserve requirements (or liquidity requirements), securities transaction Regulation to creat
Slide 28: More on the past role of regulation in FR
More on the past role of regulation in FR Ceilings on interest rates, including on government debt. Ceilings were implemented through: (a) government regulation (i.e., Regulation Q in the US); (b) caps on banks’ lending rates, a direct subsidy to the government in cases where it borrowed directly fr
Slide 29: The Liquidation of government debt: Reinhart and Sbrancia in a nutshell
The Liquidation of government debt: Reinhart and Sbrancia (RS), 2011 and 2015, in a nutshell Methodology Sweden 0.6 RS construct a “synthetic debt portfolio” for the South Africa India 1.4 1.3 Countries without a government’s total debt. The “contractual Ireland 1.9 significant WWII public debt buil
Slide 30: Key takeaways from RS: Is FR a viable option for AEs?
Key takeaways from RS In the heavily regulated financial markets of the Bretton Woods, low or negative real rates in conjunction with a plethora of financial restrictions facilitated (along with fiscal measures and growth) a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to
Slide 31: Stocktaking: FR checklist
Stocktaking: Based on the preceding review of 2000- 2021 trends, FR (not a replica of the Bretton Woods version but FRN) is well underway and intensifying post COVID-19… Perhaps the previous question was rhetorical. FR checklist i a larger footprint of the official sector (government, CB or both)
Slide 32: An FR discussion
An FR discussion • FR can deliver gradual debt erosion (1-2 percent of GDP a year was commonplace during 1945-1980) provided inflation is positive. Importantly, provided ongoing deficits are not bigger than the FR tax. • Higher levels of debt erosion usually occur in conjunction with inflation spike
Slide 33: FR and central banks
FR and central banks Does FR erode CB independence? Not necessarily de jure but very possibly de facto If a protracted period of low (negative) interest rates encourages risk taking and leverage (public and private), do financial stability/balance sheet concerns tilt policy toward continued accommod
Slide 34: References
References Agenor, Pierre‐Richard and Peter J. Montiel (2008). Development Macroeconomics, 3rd edition, Princeton University Press, Princeton. Arslanalp, Serkan and Takahiro Tsuda (2014a). "Tracking Global Demand for Advanced Economy Sovereign Debt" IMF Economic Review, Volume 62, Number 3, Washingt
Slide 35: References
References OECD, (2021). https://www.oecd-ilibrary.org/finance-and-investment/interest-rates/indicator- group/english_86b91cb3-en Reinhart, Carmen M. (2012) “The Return of Financial Repression”, Banque de France Financial Stability Review, No. 16, April, 37-48. Reinhart, Carmen M., Vincent R. Reinha
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