World Real Interest Rates: A Tale of Two Regimes
Global real interest rates were driven up in the 1980s, partly to encourage disinflation, while subsequently structural and conjunctural factors have driven rates to lower levels. The increase in the global pool of savings and the fiscal correction associated with the long economic expansion from 1992 to 2007 had put downward pressure on real rates and the extraordinary monetary policy responses since 2008 have sustained that trend into negative territory. The initial consequences of low real rates in the early part of this century had been to elevate asset prices, promote leverage in financial institutions and, as a counterparty, increase private sector indebtedness. The management of deleveraging by policymakers implies setting a low path for real rates along the yield curve by using a combination of traditional and non-traditional monetary and fiscal policies for as long as the economic dislocation persists. Facing a public and private debt overhang, low real rates help the adjustment of global balance sheets but cannot be driven low permanently by policymakers. My analysis suggests that there are two regimes for real rates; those for normal times are positive and vary with the global economic cycle, while those that deal with economic dislocation are negative. Once growth is secured, real rates will rise quickly to more normal levels, not least because, in order to limit any increase in funding costs that may result from capital inadequacy (apparent or real), banks themselves have a considerable appetite for capital, and that will also start to crank up real rates given a fixed pool of savings. It therefore seems likely that, over the medium term, real yields are likely to be in the range of 2-4%, rather than their current levels.
|Date of creation:||Feb 2012|
|Contact details of provider:|| Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP|
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Chadha, J.S. & Corrado, L. & Sun, Q., 2008.
"Money, Prices and Liquidity Effects: Separating Demand from Supply,"
Cambridge Working Papers in Economics
0855, Faculty of Economics, University of Cambridge.
- Jagjit S. Chadha & Luisa Corrado & Qi Sun, 2008. "Money, Prices and Liquidity Effects: Separating Demand from Supply," Studies in Economics 0817, School of Economics, University of Kent.
- Chadha, Jagjit S & Dimsdale, Nicholas H, 1999. "A Long View of Real Rates," Oxford Review of Economic Policy, Oxford University Press, vol. 15(2), pages 17-45, Summer.
- Francis Breedon & Jagjit S. Chadha, 2003. "Investigating Excess Returns from Nominal Bonds," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(1), pages 73-90, February. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:ukc:ukcedp:1205. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tracey Girling)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.