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Supply of Sovereign Safe Assets and Global Interest Rates

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Abstract

We estimate that the supply of sovereign safe assets is a major driver of neutral interest rates--real rates consistent with both economic activity and inflation at their trends. We find this result using an empirical cross-country model with many economic drivers for the neutral rates of 11 advanced economies during the 1960-2019 period. The increasing availability of safe assets after 2008 has pushed up neutral rates, preventing them from continuing their previous decline because of other drivers. We also evaluate the "global savings glut" hypothesis. We estimate that since 1994 the global accumulation of international exchange reserves in safe assets has lowered the availability of these assets to the private sector and, thus pushed down neutral rates. Finally, we find that economies' neutral rates are subject to important global spillovers from developments in other economies.

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  • Thiago Revil T. Ferreira & Samer Shousha, 2021. "Supply of Sovereign Safe Assets and Global Interest Rates," International Finance Discussion Papers 1315, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1315
    DOI: 10.17016/IFDP.2021.1315
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    More about this item

    Keywords

    neutral interest rates; Safe assets; International reserves; global savings glut;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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