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Why are real interest rates so low? Evidence from a structural VAR with sign restrictions

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  • Alexius, Annika

    (Dept. of Economics, Stockholm University)

Abstract

Numerous explanations for the low World real interest rate have been discussed in the literature, but only a handful of studies attempt to disentangle the relative importance of the different factors. Sign restrictions are useful for analyzing this problem since shocks to the supply of savings can be separated from shocks to investment demand using the fact that these shocks have effects of opposite signs on the equilibrium real interest rate. The bivariate model with only the real interest rate and investment indicates that shocks to investment demand have been twice as important to the recent decline in real interest rates as shocks to savings. When more shocks are included, we find that 1.26 percent of the low real interest rate 2012-2015 is due to negative business cycle shocks and 1.11 percent is due to low productivity. According to these structural VARs with sign restrictions, high savings has not been a major factor behind the recent decline in World real interest rates.

Suggested Citation

  • Alexius, Annika, 2017. "Why are real interest rates so low? Evidence from a structural VAR with sign restrictions," Research Papers in Economics 2017:6, Stockholm University, Department of Economics.
    • Handle: RePEc:hhs:sunrpe:2017_0006
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    Cited by:

    1. Milan Deskar-Škrbiæ & Antonija Buljan & Mirna Dumèiæ, 2020. "Real interest rate convergence and monetary policy independence in CEE countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 38(2), pages 349-380.

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    More about this item

    Keywords

    Real interest rate; sign restrictions; global savings and investment;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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