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Secular drivers of the global real interest rate

Rachel, Lukasz and Smith, Thomas D (2016) Secular drivers of the global real interest rate. CFM discussion paper series (571). Centre For Macroeconomics, London, UK.

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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.

Item Type: Monograph (Working Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2016 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E10 - General
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E20 - General
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E40 - General
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General
F - International Economics > F0 - General
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation
J - Labor and Demographic Economics > J1 - Demographic Economics > J11 - Demographic Trends and Forecasts
O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O30 - General
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 13 Dec 2017 10:39
Last Modified: 20 Feb 2019 04:00
URI: http://eprints.lse.ac.uk/id/eprint/86242

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