The Decline in Long Term Real Interest Rates
Causes of Decline in Long term Real Interest Rates
- Secular Stagnation – lack of aggregate demand
- Debt Overhang
- Shortage of Safe assets
- Supply side issues
- Income Inequality
- Deleveraging
- Low productivity growth
- Demographics
- Demassification of economy
- Increased Savings
- Decreased Investments
- Low foreign economic Growth
- Liquidity Trap
- Global Savings Glut
From Are Low Rates Natural?
Causes: Propensity to invest
Lower propensity to invest (Gordon, Summers)
- Demographics
- Slower TFP growth
- Shift in capital intensity of production
- Falling relative price of capital goods
- Post-crisis effects
Causes: Propensity to save
Higher propensity to save (Bernanke)
- Demography
- High savings in China
- Chinese financial integration
- Income inequality
- Post-crisis effects
Causes: Asset demands/supplies
Higher demand for safe assets
- Emerging-economy reserve accumulation
- Heightened “disaster” risk (Barro)
- Tightening of bank liquidity regulation
- Central bank asset purchases (QE)
Lower supply of safe assets (Caballero-Farhi)
- Crisis revealed many AAA-rated ABS not safe
- Euro-area debt crisis revealed some advanced- economy sovereign debt not safe
- …But lot of issuance by “safe” sovereigns too!
Key Terms:
- Nominal Rates vs Real Rates ( Inflation adjusted)
- Short term rates vs Long Term Rates
- Yield Curve or Term Structure
- Neutral Interest Rate vs Natural Interest Rate vs Equilibrium Interest Rate
- Fed Funds Rate vs Policy Rate vs Target Rate
- T-Bills, T-Notes, T-Bonds
- TIPS ( Treasury Inflation protected Securities )
- Overnight Bank Funding Rate
From Real Interest Rates Over the Long Run
Real interest rates since the 1960s have been characterized by three broad long-run trends: (1) rates have declined across numerous countries since the 1980s, (2) long-run average real interest rates are near their low for the 60-year period we examine and (3) over the past quarter century, long-run interest rates have converged internationally, consistent with an increasingly financially integrated world.
These findings have four implications.
• First, real interest rates were declining long before the global financial crisis of 2007- 09 and its aftereffects and well before the fizzling of the IT boom.
• Second, the likelihood of nominal interest rates hitting the zero lower bound has increased compared with the likelihood prior to the Great Recession.
• Third, increasing financial integration may lead to even closer international rate convergence.
• Fourth, there was a sustained increasing trend in long-run real interest rates prior to the 1980s, which suggests that the current downward trend could also reverse.
Finally, since the 1980s, the trend in global fixed investment is downward. Coupled with our main finding of the declining long-run real interest rates, this suggests that forces leading to lower investment demand have been relatively more important than those leading to increased desired saving. Put differently, while our evidence is not inconsistent with the global saving glut hypothesis, it indicates that in addition to a saving glut, there must have been forces that reduced global investment demand, and these forces must have been more important.
Key Sources of Research:
Long Term Interest Rates
Click to access interest_rate_report_final_v2.pdf
The Decline in Long-Term Interest Rates
JULY 14, 2015
MAURICE OBSTFELD AND LINDA TESAR
https://www.whitehouse.gov/blog/2015/07/14/decline-long-term-interest-rates
Selected Interest Rates (Daily) – H.15
https://www.federalreserve.gov/releases/h15/
Effective Fed Funds Rate
https://fred.stlouisfed.org/series/FEDFUNDS
10 Yrs T Bonds Constant Maturity
https://fred.stlouisfed.org/series/DGS10
3 Months T Bills
https://fred.stlouisfed.org/series/TB3MS
https://fred.stlouisfed.org/release?rid=18
Low long-term rates: bond bubble or symptom of secular stagnation?
Grégory Claeys
Low for Long? Causes and Consequences of Persistently Low Interest Rates
Charles Bean
Christian Broda
Takatoshi Ito
Randall Kroszner
Click to access Geneva17_28sept.pdf
Low long-term interest rates as a global phenomenon
Peter Hördahl, Jhuvesh Sobrun and Philip Turner
Low real interest rates: Causes and outlook
Click to access WPRealzinse.pdf
Projecting the Long-Run Natural Rate of Interest
BY KEVIN J. LANSING
Secular drivers of the global real interest rate
Lukasz Rachel and Thomas D Smith
Click to access CFMDP2016-05-Paper.pdf
PERSPECTIVES ON GLOBAL REAL INTEREST RATES
IMF
2014
Secular Stagnation: Facts, Causes, and Cures
Coen Teulings and Richard Baldwin
Click to access book_chapter_secular_stagnation_nov_2014_0.pdf
Crises in Economic Thought, Secular Stagnation, and Future Economic Research
Lawrence Summers
The decline in long-term interest rates
http://johnhcochrane.blogspot.com/2015/08/the-decline-in-long-term-interest-rates.html
Measuring the Natural Rate of Interest: International Trends and Determinants
Kathryn Holston and Thomas Laubach
John C. Williams
June 2016
Measuring the Natural Rate of Interest Redux
Thomas Laubach John C. Williams
October 2015
Real Interest Rates Over the Long Run
Decline and convergence since the 1980s
Kei-Mu Yi
Jing Zhang
Click to access kei-mu-yi-epp.pdf
The Equilibrium Real Funds Rate: Past, Present and Future
James D. Hamilton Ethan S. Harris Jan Hatzius Kenneth D. West
Click to access USMPF_2015.pdf
Why Are Long-Term Interest Rates So Low?
BY MICHAEL D. BAUER AND GLENN D. RUDEBUSCH
Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches
By Thomas A. Lubik and Christian Matthes
2015
Monetary Policy in a Low R-star World
BY JOHN C. WILLIAMS
Does Slower Growth Imply Lower Interest Rates?
BY SYLVAIN LEDUC AND GLENN D. RUDEBUSCH
Interest Rates and Economic Growth: Are They Related?
Barry P. Bosworth
Click to access interest_rates_growth_bosworth.pdf
Why are interest rates so low?
Ben S. Bernanke
https://www.brookings.edu/blog/ben-bernanke/2015/03/30/why-are-interest-rates-so-low/
Why are interest rates so low, part 2: Secular stagnation
Ben S. Bernanke
Why are interest rates so low, part 3: The Global Savings Glut
Ben S. Bernanke
Why are interest rates so low, part 4: Term premiums
Ben S. Bernanke
Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation
Lawrence H. Summers
Click to access across-the-great-divide-ch2.pdf
The challenge of low real interest rates for monetary policy
Lecture by Vítor Constâncio, Vice-President of the ECB,
Macroeconomics Symposium at Utrecht School of Economics, 15 June 2016
https://www.ecb.europa.eu/press/key/date/2016/html/sp160615.en.html
Focus on Low Real Interest Rate Might Be Misplaced
By Jonas Crews, Kevin L. Kliesen and Christopher J. Waller
Click to access real_interest_rate.pdf
Determinants of long-term interest rates
Ona Ciocyte Sander Muns Marcel Lever
Click to access CPB-Background-Document-25may2016-Determinants-of-long-term-interest-rates_0.pdf
Ultra-low or Negative Yields on Euro-Area Long-term Bonds: Causes and Implications for Monetary Policy
Daniel Gros
The Age of Secular Stagnation: What It Is and What to Do About It
February 15, 2016
published in Foreign Affairs
http://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/
Global Savings, Investment, and World Real Interest Rates
Brigitte Desroches and Michael Francis
2006-2007
Causes and consequences of low interest rates
Jean-Pierre Danthine
Vice Chairman of the Governing Board
Swiss National Bank
Click to access ref_20131114_jpd.en.pdf
Are Low Rates Natural?
Charles Bean
London School of Economics
Monetary and Financial Policy Conference London 25 September 2015
Click to access MMF_Bean_slides.pdf
Why Are Interest Rates So Low?
Marco Del Negro, Marc Giannoni, Matthew Cocci, Sara Shahanaghi, and Micah Smith
http://libertystreeteconomics.newyorkfed.org/2015/05/why-are-interest-rates-so-low.html#.VlR1ACvYj2g
Normalizing Monetary Policy When the Neutral Interest Rate Is Low
Lael Brainard
Viewpoints which Matter 
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