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

Click to access interest_rate_report_final_v2.pdf



The Decline in Long-Term Interest Rates

JULY 14, 2015




Selected Interest Rates (Daily) – H.15


Effective Fed Funds Rate


10 Yrs T Bonds Constant Maturity


3 Months T Bills



Low long-term rates: bond bubble or symptom of secular stagnation?

Grégory Claeys

Click to access PC_15_16.pdf



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


Click to access work574.pdf



Low real interest rates: Causes and outlook


Click to access WPRealzinse.pdf



Projecting the Long-Run Natural Rate of Interest


Click to access el2016-25.pdf



Secular drivers of the global real interest rate

Lukasz Rachel and Thomas D Smith


Click to access CFMDP2016-05-Paper.pdf







Click to access c3.pdf



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

Click to access c13788.pdf



The decline in long-term interest rates



Measuring the Natural Rate of Interest: International Trends and Determinants

Kathryn Holston and Thomas Laubach

John C. Williams

June 2016


Click to access HolstonLaubachWilliams2016.pdf




Measuring the Natural Rate of Interest Redux

Thomas Laubach John C. Williams

October 2015

Click to access wp2015-16.pdf




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?


Click to access el2016-36.pdf



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

By Thomas A. Lubik and Christian Matthes



Click to access eb_15-10.pdf




Monetary Policy in a Low R-star World


Click to access el2016-23.pdf



Does Slower Growth Imply Lower Interest Rates?



Click to access el2014-33.pdf



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



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



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


Click to access 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



Global Savings, Investment, and World Real Interest Rates

Brigitte Desroches and Michael Francis



Click to access desroches.pdf



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



Normalizing Monetary Policy When the Neutral Interest Rate Is Low

Lael Brainard


Click to access brainard20151201a.pdf

Author: Mayank Chaturvedi

You can contact me using this email mchatur at the rate of AOL.COM. My professional profile is on

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