Supply of Sovereign Safe Assets and Global Interest Rates

49 Pages Posted: 14 Jun 2021

See all articles by Thiago R.T. Ferreira

Thiago R.T. Ferreira

Board of Governors of the Federal Reserve System

Samer Shousha

Board of Governors of the Federal Reserve System

Date Written: April, 2021

Abstract

We estimate that the supply of sovereign safe assets is a major driver of neutral interest rates--real rates consistent with both economic activity and inflation at their trends. We find this result using an empirical cross-country model with many economic drivers for the neutral rates of 11 advanced economies during the 1960-2019 period. The increasing availability of safe assets after 2008 has pushed up neutral rates, preventing them from continuing their previous decline because of other drivers. We also evaluate the "global savings glut" hypothesis. We estimate that since 1994 the global accumulation of international exchange reserves in safe assets has lowered the availability of these assets to the private sector and, thus pushed down neutral rates. Finally, we find that economies' neutral rates are subject to important global spillovers from developments in other economies.

Keywords: neutral interest rates, Safe assets, International reserves, global savings glut

JEL Classification: E43, E21, E52

Suggested Citation

R.T. Ferreira, Thiago and Shousha, Samer, Supply of Sovereign Safe Assets and Global Interest Rates (April, 2021). International Finance Discussion Paper No. 1315, Available at SSRN: https://ssrn.com/abstract=3865431 or http://dx.doi.org/10.17016/IFDP.2021.1315

Thiago R.T. Ferreira (Contact Author)

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Samer Shousha

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.samershousha.com

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