Scarcity of Safe Assets and Global Neutral Interest Rates

Abstract

We quantitatively evaluate the role of supply and demand of safe assets in determining neutral interest rates. Using an empirical cross-country state-space model, we find that the net supply of sovereign safe assets available to the private sector in secondary markets is an important driver of neutral rates for 11 advanced economies in the period 1970–2018. We also find that the global accumulation of international reserves in sovereign safe assets since the 1990s (the global savings glut) lowered the net supply of these assets and, thus reduced neutral rates by up to 50 basis points in our sample.

Keywords: neutral interest rates, Scarcity of safe assets, International reserves, global savings glut

JEL Classification: E21, E43, E52