The Secular Decline in Real Interest Rates
Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)
- Chair: Raghuram Rajan, University of Chicago
Global Real Rates: A Secular Approach
AbstractThe current environment is characterized by low real rates and by policy rates close to or at their effective lower bound in all major financial areas. We analyze these unusual economic conditions from a secular perspective using data on aggregate consumption, wealth and asset returns. Our present-value approach decomposes fluctuations in the global consumption-to-wealth ratio over long periods of time and show that this ratio anticipates future movements of the global real rate of interest. Our analysis identifies two historical episodes where the consumption-to-wealth ratio declined rapidly below its historical average: in the late 1920s and again in the mid 2000s. Each episode was followed by a severe global financial crisis and depressed real rates for an extended period of time. Our empirical estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time.
Demographics and Real Interest Rates across Countries and over Time
AbstractWe explore the implications of demographic trends for the evolution of real interest rates over time and across countries. To that end, we first develop a multicountry, general-equilibrium model with imperfect capital mobility and differential demographic trends. We calibrate a two-country version of the model to study how low-frequency movements in a country's real interest rate depends on its own demographics and on global factors, given its degree of financial integration and its size. The more financially integrated a country is and the smaller its size, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. Drawing on the lessons from the model, we then estimate panel error-correction models relating real interest rates to possible determinants---including demographics---interacted with measures of countries' degrees of financial integration and size. Our empirical evidence supports a meaningful role for life expectancy in determining real interest rates.
Why So Low for So Long? A Long-Term View of Real Interest Rates
AbstractPrevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries’ real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.
Federal Reserve Board
Bank of International Settlements
James D. Hamilton,
University of California-San Diego
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F6 - Economic Impacts of Globalization