Are Low Real Interest Rates Here to Stay?
by Lukasz Rachel and Thomas D. Smith
Bank of England
Long-term real interest rates across the world are low,
having fallen by about 450 basis points (bps) over the past
thirty years. To understand whether low real rates are here
to stay, we need to understand what has caused the decline.
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 bps of the 450
bps fall. Our quantitative analysis highlights slowing global
growth expectations 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 an increase in the spread
between risk-free and actual interest rates. Looking ahead,
in the absence of sustained changes in policy, 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 around 1 percent 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
JEL Codes: E02, E10, E20, E40, E50, E60, F00, F41, F42, F47, J11, O30, O40.
Full article (PDF, 42 pages, 1001 kb)
Discussion by Pierre-Olivier Gourinchas