July 31, 2025

The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.

This edition was written by Emily Araujo, Tristan Loa, Chase Parry, and Louise Sheiner.

Stablecoins could lower US interest rates in the long run

Marina Azzimonti of the Federal Reserve Bank of Richmond and Vincenzo Quadrini of the University of Southern California show that the impact of stablecoin growth on U.S. interest rates depends on the assets used to back them: If stablecoins are backed by U.S. dollar denominated assets, demand for U.S. debt rises and interest rates fall. If they are backed by crypto assets, the opposite occurs. In simulations calibrated to current financial patterns, the dollar-backed case dominates, leading to lower long-run U.S. interest rates and greater global imbalances, with foreign holdings of Treasuries rising and the U.S. current account deficit widening. The authors also find that the growth of stablecoins has asymmetric effects on macroeconomic volatility: it increases consumption volatility in the U.S., which takes on a larger net borrowing position, while reducing it in the rest of the world.

Contractionary monetary policy dampens investment in innovation 

Analyzing German firm-level responses to a survey conducted between October and December 2023, Michaela Elfsbacka-Schmöller of the European Central Bank and Olga Goldfayn-Frank and Tobias Schmidt of the German Bundesbank find that monetary tightening by the ECB—raising rates from zero to 4.5% between 2022 and 2023—reduced investment in R&D and technology adoption by about 20%. Firms most affected by the rate increase were typically smaller, less productive, more indebted (particularly with variable-rate loans), and had higher inflation expectations. When asked how their innovation spending would change under hypothetical rate hikes or cuts from the 4.5% baseline, firms reported roughly symmetric responses. However, the authors caution that many firms had already reduced their innovation investments to zero at the 4.5% rate, suggesting that the investment elasticity may depend on the policy rate. The authors conclude that because innovation investment is sensitive to the policy rate, monetary policy can affect long-term productivity and may not be neutral even in the long run. 

Balance sheet policy is effective, even away from the lower bound 

Benoît Mojon, Phurichai Rungcharoenkitkul, and Dora Xia of the Bank for International Settlements find that central bank balance sheets affect financial conditions even when interest rates are above the zero lower bound. After 2015, as policy rates began rising, the Federal Reserve’s still-large balance sheet kept overall monetary conditions looser than the rate increases alone would suggest; at times, financial conditions eased even as the Fed was raising rates. During the COVID-19 pandemic, balance sheet expansion played a key role in closing the output gap more quickly, though at the cost of roughly one percentage point higher peak inflation. The authors show the pattern holds globally: when many central banks expand their balance sheets simultaneously, monetary conditions worldwide become easier. They estimate that worldwide balance sheet expansion at the height of the pandemic provided stimulus equivalent to a 50-basis-point cut in short-term interest rates. The authors construct a Monetary Conditions Index to capture both the effects of policy rates and central bank balance sheets on financial conditions.

Investors are growing share of single-family home purchases

Chart courtesy of The Wall Street Journal

Quote of the week

"Despite bank regulators’ significant influence on our economy, up until now, financial regulation has not been nested in a broader strategic vision for the financial system," says Treasury Secretary Scott Bessent.

"Instead, we have seen regulation by reflex. Rather than preempting crises, regulators all too often react to them after the fact. They play the role of a hazmat cleanup team instead of preventing dangerous spillovers in the first place. This is especially true in the case of supervisory failures, where regulators often overcompensate by piling rule on top of rule, based on an incomplete understanding of the larger costs and benefits to society. This reactionary approach can generate regulations at odds with our domestic and international priorities.

Some argue that in the past, regulatory weakening occurred when regulators failed to keep pace. And yet, the financial regulators have not, up to now, kept pace with digital assets or comprehended how their regulation by reflex was undermining the community bank model. Post-mortems to recent crises have been more self-serving exercises designed to support longstanding political agendas rather than honest, searching assessments about how to improve the system.

Rather than reflexively regulate anything that hits the headlines, we need to instead be more explicit about our vision for the financial system…

Outdated capital requirements on some exposures are misaligned with actual risk, imposing unnecessary burdens on financial institutions. Excessive capitalization, for example, reduces bank lending. This stymies growth and distorts market structure in ways that increase risk. How? By driving lending out of the regulated banking system to nonbank intermediaries."

About the Hutchins Center on Fiscal and Monetary Policy at Brookings

The mission of the Hutchins Center on Fiscal and Monetary Policy is to improve the quality and efficacy of fiscal and monetary policies and public understanding of them.