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Perspectiveson Low Global Interest Rates

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  • Luis Catão
  • G. A. Mackenzie

Abstract

This paper looks at the dramatic decline in global real interest rates in recent years from a historical perspective and examines the various factors that may account for this trend. We show that current levels of real interest rates on long-term bonds in advanced economies are not low by historical standards and that it is the real long bond rates of the early 1980s through much of the 1990s that look anomalous. We also find that current global long-term interest rates are roughly in line with what one would predict given current price-earnings (P/E) ratios and under reasonable assumptions about the equity risk premia and the expected rate of growth of earnings in advanced countries. Finally, we provide econometric evidence that global long-term interest rates are significantly affected by commodity prices, expected productivity growth, and fiscal consolidation in advanced countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/76.

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Length: 31
Date of creation: 01 Mar 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/76

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Keywords: Savings; Economic models; bond; inflation; real interest rates; real interest rate; bonds; bond yields; stock prices; stock market crash; real rate of interest; stock market; discount rate; government bonds; nominal interest rate; treasury bond; international reserves; real rates; bond rate; government bond; stock markets; bond rates; price inflation; long-term bonds; stock of capital; term bonds; international finance; bond instruments; fisher equation; inflationary expectations; risk-free interest rate; price level; financial systems; bond yield; bond valuations; long-term bond yield; domestic financial systems; global stock markets; relative price; financial markets; stock market crashes; rational expectations; actual inflation; financial globalization; lower inflation; international financial statistics; global bond; present value; financial sector; financial services; term bond; terms of trade; stock market bubble; denominated bonds; equity market; financial policies; yields on bonds; financial instruments;

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References

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  1. Robert J. Barro & Xavier Sala-i-Martin, 1990. "World Real Interest Rates," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1990, Volume 5, pages 15-74 National Bureau of Economic Research, Inc.
  2. Luis Catão, 2006. "Sudden Stops and Currency Drops," IMF Working Papers 06/133, International Monetary Fund.
  3. Barsky, Robert B & De Long, J Bradford, 1991. "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(3), pages 815-36, August.
  4. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
  5. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  6. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
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Citations

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Cited by:
  1. Guy Meredith, 2007. "Debt Dynamics and Global Imbalances," IMF Working Papers 07/4, International Monetary Fund.
  2. Bruno Ducoudré, 2006. "Politique monetaire, inertie des taux longs Americains et choix de portefeuille," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2006-09, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Andrzej Toroj, 2009. "Macroeconomic adjustment and heterogeneity in the euro area," National Bank of Poland Working Papers, National Bank of Poland, Economic Institute 54, National Bank of Poland, Economic Institute.
  4. Manmohan S. Kumar & David Hauner, 2006. "Fiscal Policy and Interest Rates," IMF Working Papers 06/112, International Monetary Fund.

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