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Why so low for so long? A long-term view of real interest rates

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  • Claudio Borio
  • Piti Disyatat
  • Mikael Juselius
  • Phurichai Rungcharoenkitkul

Abstract

Prevailing explanations of the decline in real interest rates since the early 1980s are premised on the notion that real interest rates are driven by variations in desired saving and investment. But based on data stretching back to 1870 for 19 countries, our systematic analysis casts doubt on this view. The link between real interest rates and saving-investment determinants appears tenuous. While it is possible to find some relationships consistent with the theory in some periods, particularly over the last 30 years, they do not survive over the extended sample. This holds both at the national and global level. By contrast, we find evidence that persistent shifts in real interest rates coincide with changes in monetary regimes. Moreover, external influences on countries' real interest rates appear to reflect idiosyncratic variations in interest rates of countries that dominate global monetary and financial conditions rather than common movements in global saving and investment. All this points to an underrated role of monetary policy in determining real interest rates over long horizons.

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  • Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2017. "Why so low for so long? A long-term view of real interest rates," BIS Working Papers 685, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:685
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    Cited by:

    1. Philip Barrett, 2018. "Interest-Growth Differentials and Debt Limits in Advanced Economies," IMF Working Papers 18/82, International Monetary Fund.
    2. Belke, Ansgar & Klose, Jens, 2018. "Equilibrium real interest rates, secular stagnation, and the financial cycle: Empirical evidence for euro-area member countries," Ruhr Economic Papers 743, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2018. "Monetary policy in the grip of a pincer movement," BIS Working Papers 706, Bank for International Settlements.
    4. Gilles Dufrénot & Meryem Rhouzlane, 2018. "Secular Stagnation: New Challenges for the Industrialized Countries in the 21st Century," Working Papers halshs-01821669, HAL.
    5. repec:pal:buseco:v:53:y:2018:i:2:d:10.1057_s11369-018-0077-1 is not listed on IDEAS
    6. Edward Nelson, 2018. "Seven Fallacies Concerning Milton Friedman's "The Role of Monetary Policy"," Finance and Economics Discussion Series 2018-013, Board of Governors of the Federal Reserve System (US).
    7. repec:onb:oenbmp:y:2018:i:q2/18:b:1 is not listed on IDEAS

    More about this item

    Keywords

    real interest rate; natural interest rate; saving; investment; inflation; monetary policy;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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