| 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. |