Commentary: Low Interest Rates: Causes and Consequences
by Robert E. Hall
Hoover Institution and Department of Economics, Stanford University, National Bureau of Economic Research
World interest rates have been declining for several decades.
In a general equilibrium setting, the interest rate is determined
by the interaction of a number of types of behavior: the policy
of the central bank, investment in productive assets, the choice
between current and future consumption, and the responses of
wealth holders to risk. Central banks devote consider effort
to determining equilibrium real rates, around which they set
their policy rates, though measuring the equilibrium rate is
challenging. The real interest rate is also connected to the
marginal product of capital, though the connection is loose.
Similarly, the real interest rate is connected to consumption
growth through a Euler equation, but again many other influences
enter the relationship between the two variables. Finally,
the idea of the “global saving glut” suggests that the rise of
income in countries with high propensities to save may be a
factor in the decline in real rates. That idea receives support in
a simple model of global financial equilibrium between countries
with risk tolerance (the United States) and ones with high
risk aversion (China).
JEL Codes: E21, E22, E43, E52.
Full article (PDF, 15 pages, 1713 kb)