Global Trends in Interest Rates

Abstract

The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.

Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

“…The …rst strand relies on pure multivariate time-series models such as the univariate local level model, the time-varying-parameter vector autoregression model, and the multivariate trend-cycle decomposition approach. 3 Compared to other more structural models, the pure time-series models tend to impose fewer 1 Holston et al (2017) and Del Negro et al (2018), among others, suggest that estimated natural rates in a variety of (mostly developed) countries have exhibited similar declining patterns over the past two decades while Wynne and Zhang (2018b) show the same for the world natural rate. Apart from academic research on the global determinants of the natural rate, there is growing awareness among policymakers who recognize the signi…cance of global forces on the domestic natural rate and in domestic monetary policymaking (see, e.g., Williams (2017), Powell (2018)).…”

“…Fiorentini et al (2018) adopt a local-level model with stochastic volatility to estimate the natural interest rates for 17 advanced economies with over a century of data. Del Negro et al (2017) and Del Negro et al (2018) infer the natural interest rate from a spectrum of bond yields with a trend-cycle decomposition approach, while Johannsen and Mertens (2018) adopt a similar methodology but use shadow rates to take into account the period when policy rates became in many countries constrained at their e¤ective-lower bound (ELB) (from 2008 to 2015 or later in some countries). restrictions, thereby letting the data speak for itself, which generally results in a more ‡exible estimation of the unobserved natural rate.…”

“…Third, the synchronization of nominal interest rates across all countries in our sample is mostly attributable to the strong comovement in the natural rate, while the interest rate gap (monetary policy stance) 1 comovement is fairly weak across countries. Recent evidence suggests that the natural rate of the leading advanced economies has declined to historically low and even negative levels over the last two decades (e.g., Holston et al (2017) and Del Negro et al (2018)). 1 Similarly, monetary policy has generally been loose across the small open-economy countries in our sample in recent years, and our evidence suggests that the natural rate comoves positively and quite strongly with a broad range of measures of the U.S. natural rate, providing external validation of international spillovers (contagion).…”

Interest Rate Trends in a Global Context

“…However, they interpret the changes in investor behavior as stemming from deleveraging after the great financial crisis. Deleveraging might provide an alternative interpretation for recently growing convenience yields measured in Del Negro et al (2018).…”

“…If anything, the demographic argument suggests that the changing age composition of the population should be putting an upward pressure on the real rate and on EP. Del Negro et al (2018) point out the divergence between YM and interest rates for other countries as well. 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Real 10-year rate (left axis)…”