Secular Drivers of the Global Real Interest Rate

66 Pages Posted: 12 Dec 2015

Date Written: December 11, 2015

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

JEL Classification: E02, E10, E20, E40, E50, E60, F00, F41, F42, F47, J11, O30, O40

Suggested Citation

Rachel, Lukasz and Smith, Thomas, Secular Drivers of the Global Real Interest Rate (December 11, 2015). Bank of England Working Paper No. 571. Available at SSRN: https://ssrn.com/abstract=2702441 or http://dx.doi.org/10.2139/ssrn.2702441

Lukasz Rachel (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Thomas Smith

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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