Claudia Buch: Financial stability and monetary policy - from low-for-long to the new normal

Keynote speech by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, at the Konstanz Seminar, Constance, 24 May 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Check against delivery.

Thank you very much for inviting me to talk at this year's Konstanz Seminar. The Konstanz Seminar is clearly a landmark institution for monetary policy discussions in Germany – and beyond. It was founded in 1970 by Karl Brunner. My academic teacher at the University of Bonn, Professor Manfred J.M. Neumann has played a key role over many years to keep the seminar a vibrant place. Monetarists' views of monetary policy have been a unifying feature for many participants of the seminar. I vividly recall my first visit to the seminar in the late 1990s. 

Much has happened since then. In academia, there has been a revolution in terms of using microdata to understand the transmission of monetary policy and using improved empirical methods to identify causal effects.

In policymaking, we have gone through an extended period of quantitative easing after the global financial crisis, operating in part through the risk-taking channel. Macroprudential policy has developed into a distinct policy field, recognising that excessive risk-taking in the financial system cannot solely be addressed with microprudential tools. 

This shift in focus has been one of the major leaps forward compared to the economics taught during the 1990s; and rightly so. Recent turbulences on banking markets are a vivid reminder how closely intertwined stress of individual institutions and monetary policy decisions can be.

Today, I will focus on the interaction between monetary policy and financial stability. I will structure my comments around three points:

First, the low-for-long interest rate environment of the past decade has been quite exceptional. Inflation was low. Monetary policy was highly expansionary. Growth has been stable. Financial market volatility was low for the most part. Risks appeared to be low, too.

But, second, during the period of low interest rates, vulnerabilities have been building up beneath the surface. Assets and liabilities of many financial institutions have become more vulnerable to increasing interest rates. Benign macroeconomic conditions of the past may too easily have been projected into the future.