The Big Ease and what's next?

Swiss Re and LSE launch research partnership on monetary policy and long-term investment

Swiss Re and the London School of Economics and Political Science (LSE) have announced a formal partnership to support an 18-month research programme on monetary policy and long-term investment.

A roundtable discussion at the LSE on 14 November presented some preliminary results from the two current research themes the partnership has set out to explore.

The first concerns the evolving structure of central bank balance sheets, and its implications for a well-functioning financial market. During the financial crisis, many major central banks expanded their asset holdings in efforts to provide monetary accommodation and consequently support economic activity. Some central banks continue in this direction even today. In a persistently low interest rate environment, central banks may turn more frequently to their balance sheet as an instrument of policy, raising questions both about the type of assets to hold and structure of liabilities.

The second project will research the effect of loose monetary policy on the incentives for structural reforms across Europe. The loose monetary policy has allowed governments to borrow at essentially no cost, reducing their incentive to reform their economies. There are some differences across Europe, especially among Eurozone and non-Eurozone countries. These differences can be exploited to conduct comparative analysis on the effects of loose monetary policy on structural reforms.

Jerome Haegeli, Swiss Re's Head of Investment Strategy, said: "Central banks' dominant role in financial markets is not sustainable. The costs are outweighing the benefits. Low interest rates result in a “tax” on savers and long-term investors alike. To increase financial market resilience, private capital markets should be strengthened. The allocation of private sector's risk capital is distorted and not put to best use for financing the real economy."