The Causes and Challenges of Low Interest Rates: Insights from Basic Principles and Recent Literature

China Finance Review International, forthcoming

30 Pages Posted: 8 Jul 2020 Last revised: 16 Oct 2020

See all articles by Youchang Wu

Youchang Wu

University of Oregon - Lundquist College of Business

Date Written: September 3, 2020

Abstract

Real risk-free interest rates in major developed economies have declined significantly since the 1980s. This paper explores the causes of this downward trend and its challenges for monetary policy by drawing insights from both basic principles of interest rate determination and latest research. The literature suggests that the decline is likely an outcome of multiple technological, social, and economic factors including diminished productivity growth, changing demographics, elevated tail risk concerns, time-varying convenience yields of safe assets, increased global demand for safe assets, rising wealth and income inequality, falling relative price of capital, and accommodative monetary policies. I discuss merits and limitations of explanations based on these factors, and emphasize the importance of a better understanding of economic forces driving diverging trends of corporate investment and saving behaviors. I also review the implications of the Neo-Fisherism and the fiscal theory of price level for monetary policy in a low interest rate environment.

Keywords: interest rate, safe asset, tail risk, secular stagnation, monetary policy, zero lower bound

JEL Classification: E43, E52, G12, G31

Suggested Citation

Wu, Youchang, The Causes and Challenges of Low Interest Rates: Insights from Basic Principles and Recent Literature (September 3, 2020). China Finance Review International, forthcoming, Available at SSRN: https://ssrn.com/abstract=3628075 or http://dx.doi.org/10.2139/ssrn.3628075

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
40
Abstract Views
284
PlumX Metrics