Source : VoxEu Secular Stagnation ebook - O. Blanchard, Furceri & Pescatori

 

From a peak of about 5% in 1986, the world real interest rate fell to about 2% before the Global Crisis, and to approximately 0% in 2012. This chapter discusses the major factors behind this decline both before and during the Crisis, and argues that most of them are still relevant. Indeed, the legacies of the Crisis may imply an even lower natural rate in future. This would be bad news for monetary policy, but good news for fiscal policy and debt overhang.

Figure 1 shows the evolution of the world real interest rate over the last 30 years. More specifically, it shows the evolution of the GDP-weighted average of ten-year real interest rates on sovereign bonds across 19 advanced economies since 1985. It has two striking features.

The first is the decline in the rate from a peak of about 5% in 1986 to 2% before the crisis and to approximately zero in 2012. This evolution has led to the worry that the rate needed to maintain output at potential may remain very low in the future, perhaps even negative. Given the combination of the zero lower bound on nominal rates and low inflation, such a negative real rate might be impossible to achieve, leading to insufficient demand – a worry known as the ‘secular stagnation’ hypothesis.

The second is the degree to which real interest rates have increasingly moved together, as shown by the tight – indeed, increasingly tighter – interquartile range for individual country real interest rates in the figure. This suggests that one can, and actually must, think of a global interest rate, determined in a global market. The factors behind movements in the global real rate are the focus of this chapter. (...) To read the full article