Why So Low for So Long? A Long-Term View of Real Interest Rates

73 Pages Posted: 20 Dec 2017

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Piti Disyatat

Bank for International Settlements (BIS)

Mikael Juselius

Bank of Finland

Phurichai Rungcharoenkitkul

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 2017

Abstract

Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.

Keywords: real interest rate, natural interest rate, saving, investment, inflation, monetary policy

JEL Classification: E32, E40, E44, E50, E52

Suggested Citation

Borio, Claudio E.V. and Disyatat, Piti and Juselius, Mikael and Rungcharoenkitkul, Phurichai, Why So Low for So Long? A Long-Term View of Real Interest Rates (December 2017). BIS Working Paper No. 685, Available at SSRN: https://ssrn.com/abstract=3090799

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Piti Disyatat

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Mikael Juselius

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Phurichai Rungcharoenkitkul (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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