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Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound

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  • Gourinchas, Pierre-Olivier
  • Rey, Hélène

Abstract

The current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment. First, we decompose the fluctuations in the world consumption wealth ratio over long period of times and show that they anticipate movements of the real rate of interest. Second, our estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time. In this context, we argue that there is a renewed Triffin dilemma where safe asset providers face a trade-off in terms of external exposure and real appreciation of their currency. This trade-off is particularly acute for smaller economies. This is the `curse of the regional safe asset provider.' We discuss how this `curse' is playing out for two prominent regional safe asset providers: core EMU and Switzerland.

Suggested Citation

  • Gourinchas, Pierre-Olivier & Rey, Hélène, 2016. "Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound," CEPR Discussion Papers 11503, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11503
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    Cited by:

    1. repec:eee:jbfina:v:90:y:2018:i:c:p:32-49 is not listed on IDEAS
    2. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2016. "Monetary policy for a bubbly world," Economics Working Papers 1533, Department of Economics and Business, Universitat Pompeu Fabra.
    3. repec:onb:oenbmp:y:2018:i:q2/18:b:1 is not listed on IDEAS
    4. Borio, Claudia & Disyatat, Piti & Juselius, Mikael & Rungcharoenkitkul, Phurichai, 2017. "Why so low for so long? A long-term view of real interest rates," Research Discussion Papers 36/2017, Bank of Finland.
    5. Mariam Camarero & Jesús Peiró-Palomino & Cecilio Tamarit, 2017. "External imbalances and growth," Working Papers 2017/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    6. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.
    7. Guido Baldi & Björn Bremer & Thore Schlaak, 2017. "Internationale Investitionen und Leistungsbilanzungleichgewichte: Die Bedeutung von Wertschwankungen," DIW Roundup: Politik im Fokus 117, DIW Berlin, German Institute for Economic Research.
    8. Rémi Bazillier & Jérôme Héricourt & Samuel Ligonnière, 2017. "Structure of Income Inequality and Household Leverage: Theory and Cross-Country Evidence," Working Papers 2017-01, CEPII research center.
    9. Zorell, Nico, 2017. "Large net foreign liabilities of euro area countries," Occasional Paper Series 198, European Central Bank.

    More about this item

    Keywords

    real interest rates; secular stagnation; Triffin dilemma;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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