Tag Archives: Neutral rate

Drivers of long-term global interest rates – can changes in desired savings and investment explain the fall?

Authors: Lukasz Rachel and Thomas Smith.

In this post we show how various secular trends – demographics, inequality and the emerging market savings glut – raised desired savings at the global level and put downward pressure on real rates.  We also show how desired investment could have fallen due to the decline in the relative price of capital goods, lower public investment and a rise in the spread between risk-free rates and the return on capital.  Together we think these secular trends can account for 300bps of the historic decline in the global real rate.  Moreover, we think these secular trends are likely to persist. This suggests the global neutral rate, which acts as an anchor for individual countries’ equilibrium rates in the long-term, will remain low, perhaps around 1%. Continue reading

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Drivers of long-term global interest rates – can weaker growth explain the fall?

Authors: Lukasz Rachel and Thomas Smith.

Long-term real interest rates have fallen substantially over the past thirty years.  The co-movement in real rates across both advanced and emerging economies suggests a common driver is at work – the global neutral rate may have fallen.  In this two-part blog post we attempt to identify which secular trends could have driven such a fall.  In Part 1 we highlight how weaker expectations for global trend growth can account for around 100bps of the 450bps fall in real rates since the 1980s.  But this effect seems to mainly apply to the post-crisis period – suggesting other factors are responsible for the protracted decline before the crisis.
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Filed under Financial Markets, International Economics, Macroeconomics, Monetary Policy