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Secular Drivers of the Global Real Interest Rate

Lukasz Rachel and Thomas Smith

No 1605, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.

Keywords: Equilibrium Interest Rate; Long-term Yields; Global Saving and Investment; Global Trend (search for similar items in EconPapers)
JEL-codes: E02 E10 E20 E40 E50 E60 F00 F41 F42 F47 J11 O30 O40 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2015-12
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-opm
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Citations: View citations in EconPapers (171)

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Related works:
Working Paper: Secular drivers of the global real interest rate (2016) Downloads
Working Paper: Secular drivers of the global real interest rate (2015) Downloads
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