A world of low interest rates

The interest rates have remained low in recent years, after long decline over the past thirty-five years in OECD countries. This evolution is associated to a slowdown of output growth, while inflation stabilized around its two percent target. In trying to provide a better understanding on how we got there, we review the macroeconomic developments during almost sixty years. Conventional analysis of the role of macroeconomic policy does not provide a satisfactory explanation of the observed long-term trends. In particular, large fiscal deficits and growing debt ratios did not lead to higher interest rates, except in a few countries, whose governments were facing serious fiscal troubles. Conservative monetary policy can explain the low level of inflation that have prevailed since the middle of the eighties, but not the continuous decline of the real interest rate. Based on a few stylized facts we suggest a direction for a plausible characterization of a low growth / low interest rate regime