The Decline in Long Term Real Interest Rates

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

https://www.whitehouse.gov/sites/default/files/docs/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

http://bruegel.org/wp-content/uploads/2016/09/PC_15_16.pdf

 

 

Low for Long? Causes and Consequences of Persistently Low Interest Rates

Charles Bean

Christian Broda

Takatoshi Ito

Randall Kroszner

 

http://voxeu.org/sites/default/files/file/Geneva17_28sept.pdf

 

 

Low long-term interest rates as a global phenomenon

Peter Hördahl, Jhuvesh Sobrun and Philip Turner

 

http://www.bis.org/publ/work574.pdf

 

 

Low real interest rates: Causes and outlook

 

https://www.allianz.com/v_1453369613000/media/economic_research/publications/working_papers/en/WPRealzinse.pdf

 

 

Projecting the Long-Run Natural Rate of Interest

BY KEVIN J. LANSING

http://www.frbsf.org/economic-research/files/el2016-25.pdf

 

 

Secular drivers of the global real interest rate

Lukasz Rachel and Thomas D Smith

 

http://www.centreformacroeconomics.ac.uk/Discussion-Papers/2016/CFMDP2016-05-Paper.pdf

 

 

PERSPECTIVES ON GLOBAL REAL INTEREST RATES

IMF

2014

 

https://www.imf.org/external/pubs/ft/weo/2014/01/pdf/c3.pdf

 

 

Secular Stagnation: Facts, Causes, and Cures

Coen Teulings and Richard Baldwin

 

http://scholar.harvard.edu/files/farhi/files/book_chapter_secular_stagnation_nov_2014_0.pdf

 

 

Crises in Economic Thought, Secular Stagnation, and Future Economic Research

Lawrence Summers

http://www.nber.org/chapters/c13788.pdf

 

 

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

 

http://piketty.pse.ens.fr/files/HolstonLaubachWilliams2016.pdf

 

 

 

Measuring the Natural Rate of Interest Redux

Thomas Laubach John C. Williams

October 2015

http://www.frbsf.org/economic-research/files/wp2015-16.pdf

 

 

 

Real Interest Rates Over the Long Run

Decline and convergence since the 1980s

Kei-Mu Yi

Jing Zhang

 

https://www.minneapolisfed.org/~/media/files/pubs/eppapers/16-10/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

 

http://econweb.ucsd.edu/~jhamilto/USMPF_2015.pdf

 

 

Why Are Long-Term Interest Rates So Low?

BY MICHAEL D. BAUER AND GLENN D. RUDEBUSCH

http://www.frbsf.org/economic-research/files/el2016-36.pdf

 

 

Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches

By Thomas A. Lubik and Christian Matthes

2015

 

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_brief/2015/pdf/eb_15-10.pdf

 

 

 

Monetary Policy in a Low R-star World

BY JOHN C. WILLIAMS

http://www.frbsf.org/economic-research/files/el2016-23.pdf

 

 

Does Slower Growth Imply Lower Interest Rates?

BY SYLVAIN LEDUC AND GLENN D. RUDEBUSCH

 

http://www.frbsf.org/economic-research/files/el2014-33.pdf

 

 

Interest Rates and Economic Growth: Are They Related?

Barry P. Bosworth

 

https://www.brookings.edu/wp-content/uploads/2016/06/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

https://www.brookings.edu/blog/ben-bernanke/2015/03/31/why-are-interest-rates-so-low-part-2-secular-stagnation/

 

 

Why are interest rates so low, part 3: The Global Savings Glut

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/

 

 

Why are interest rates so low, part 4: Term premiums

Ben S. Bernanke

https://www.brookings.edu/blog/ben-bernanke/2015/04/13/why-are-interest-rates-so-low-part-4-term-premiums/

 

 

Low Equilibrium Real Rates, Financial Crisis, and Secular Stagnation

Lawrence H. Summers

http://www.hoover.org/sites/default/files/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

 

https://www.stlouisfed.org/~/media/Publications/Regional%20Economist/2016/January/real_interest_rate.pdf

 

 

Determinants of long-term interest rates

 

Ona Ciocyte Sander Muns Marcel Lever

 

https://www.cpb.nl/sites/default/files/omnidownload/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

 

https://www.ceps.eu/system/files/D%20Gros%20on%20Ultra-low%20or%20Negative%20Yields%20on%20Euro-Area%20Long-term%20Bonds%20-%20CEPS%20WD.pdf

 

 

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

 

http://www.bankofcanada.ca/wp-content/uploads/2010/06/desroches.pdf

 

 

Causes and consequences of low interest rates

Jean-Pierre Danthine

Vice Chairman of the Governing Board
Swiss National Bank

https://www.snb.ch/en/mmr/speeches/id/ref_20131114_jpd/source/ref_20131114_jpd.en.pdf

 

 

Are Low Rates Natural?

Charles Bean

London School of Economics

Monetary and Financial Policy Conference London 25 September 2015

http://www.mmf.ac.uk/images/documents/2015/Sept15Conf/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

 

https://www.federalreserve.gov/newsevents/speech/brainard20151201a.pdf

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Author: Mayank Chaturvedi

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