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Tend German households to be net-savers?
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Return on average households’ asset holdings
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Be concerned about the formation of bubbles? Auf einer Seite lesen

One should be concerned about the formation of bubbles

The low policy rate environment affects both the return of savers on their assets as well as the interest rate borrowers pay on their liabilities less than commonly thought. Households’ average return, even for low income households, is not significantly different in the low policy rate environment as it has been in more “normal” times. Considering that inflation rates were also lower in the low policy rate environment, real returns to most households were higher than in 2003 to 2007, largely due to the appreciation of real estate prices. At the same time, while households that borrow benefit from low policy rates, they do not benefit by as much as previously thought due to the fact that banks are slow to pass on low policy rates to their customers. On a net basis, the average household in Germany, despite being a net saver, benefited from the low policy rate environment. Of course for each individual household, this depends crucially on the composition of her portfolio. Households with a balanced portfolio including real estate and equity fared better than those with all of their savings in savings accounts. This result simply re-iterates what many observers have emphasized for a long time: The low share of homeownership and the low participation rate in the stock market hurts the return German households are able to obtain on their savings. Aggregating these higher returns and lower interest costs across households, households benefited from the low policy rate environment by 364 billion Euro in real terms, i.e. adjusted for inflation. There are, however, significant redistributive effects. Low income renters do not benefit, but lose under the low policy rate regime, although by individually small amounts. High income homeowners benefit disproportionally, because they benefit from lower interest on mortgages and from the appreciation of real estate values.

Low income renters do not benefit, but lose under the low policy rate regime, although by individually small amounts.

We concede that the gains on equity and real estate are unrealized gains and therefore have a somewhat different quality than interest income from a savings account. Hence, ideally one would need to calculate risk adjusted returns, but this is beyond the scope of this note. What are the theoretical underpinnings of this result? The costs and benefits in terms of deposit rates and borrowing cost to consumers coming from a central bank’s policy rate depend on the speed of and extent to which these policy rates are passed through to retail rates. The literature shows that this speed is a function of the competition between financial institutions, and the competition between financial institutions and financial markets. In the absence of such competition, policy rates have an effect on retail rates that is asymmetric in two dimensions: One, it is asymmetric in the sense that high policy rates are only partially reflected in deposit rates. This is the reason for the surprisingly small effect of the low policy rate environment on deposit rates: Deposit rates even in the high policy rate environment were quite low and, hence, in absolute terms had little room to decline when policy rates  declined, even though banks reacted quickly to the low policy rate environment. Second, borrowing rates fully reflected the high policy rate environment, but with the exception of mortgages did not decline by the full change in policy rates. This is especially true for rates on overdrafts of checking accounts.

Finally, it is not a coincidence that equities and real estate values appreciated in the low policy rate regime. Standard finance text books show that stock prices are simply the discounted value of future corporate profits. If firms face lower costs on debt and profits are discounted by a lower discount rate, stock prices tend to rise. Similarly, if interest rates on mortgages fall, demand for real estate may rise, leading to an appreciation of house values. Further, households may find the return on savings accounts unsatisfactory and switch to other asset classes, resulting in an appreciation. This is precisely why one should be concerned about the formation of bubbles both in equity and real estate markets in the context of a low policy rate regime.

The true cost to households may indeed only arise once the central bank ends the expansionary monetary policy, not while the expansionary monetary policy is ongoing.


Di Maggio, M.; Kermani, A.; Ramcharan, R.: Monetary Policy Pass-Through: Household Consumption and Voluntary Deleveraging. Columbia Business School Research Paper, No. 14-24, 2014.

Gropp, Reint E.; Kok, C.; Lichtenberger, J.-D.: The Dynamics of Bank Spreads and Financial Structure, in: Quarterly Journal of Finance, Vol. 4(4), 2014, 1-53.

Real Net Assets of Private Households in Germany Shrank Between 2003 and 2013; DIW; Press Release of 19 August 2015.

The Eurosystem Household Finance and Consumption Survey Methodological Report for the First Wave; Statistics Paper Series, ECB; No. 1 April 2013.

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The Dynamics of Bank Spreads and Financial Structure

Reint E. Gropp Christoffer Kok J.-D. Lichtenberger

in: Quarterly Journal of Finance, Nr. 4, 2014


This paper investigates the effect of within banking sector competition and competition from financial markets on the dynamics of the transmission from monetary policy rates to retail bank interest rates in the euro area. We use a new dataset that permits analysis for disaggregated bank products. Using a difference-in-difference approach, we test whether development of financial markets and financial innovation speed up the pass through. We find that more developed markets for equity and corporate bonds result in a faster pass-through for those retail bank products directly competing with these markets. More developed markets for securitized assets and for interest rate derivatives also speed up the transmission. Further, we find relatively strong effects of competition within the banking sector across two different measures of competition. Overall, the evidence supports the idea that developed financial markets and competitive banking systems increase the effectiveness of monetary policy.

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