Why so Low for so Long? A Long-Term View of Real Interest Rates

Neutral Real Interest Rates in Inflation Targeting Emerging and Developing Economies

“…A onepercentage-point increase in the relative price of capital leads to a 0.05 percent increase in the neutral real interest rate. The sign is positive, as expected in theory, suggesting that a reduction in relative price of capital reduces demand for investment; less investment is needed to maintain a similar level of output (Borio et al, 2017;IMF (International Monetary Fund), 2014;Rachel and Smith, 2015). Life expectancy is also significant with a one year increase in life expectancy decreasing the neutral interest rate by 0.4 percentage point.…”

“…There are detractors to the broader focus of the literature on saving and investment. Borio et al (2017) argue that the longer run link between saving and investment, and the real interest rate is tenuous with changes in monetary regimes and movements in global financial conditions the likely culprits in driving interest rates.…”

“…These variables are identified in the literature as plausible drivers of the ex ante saving and investment schedules that would drive changes in the neutral interest rate based on the theory of loanable funds (see, for example, Borio et al, 2017 andRachel andSmith, 2015). Global saving and investment tests the theory of a global savings glut driving interest rates.…”

“…Global factors such as the trend decline in U.S. neutral real interest rates or rising global savings do not help explain the EMDE decline. This leaves an unsatisfactory conclusion to the possible drivers of the EMDE neutral real interest rate and plausible explanations include changes in monetary regimes as suggested in Borio et al (2017).…”

Global estimates of the implications of COVID‐19‐related preprimary school closures for children’s instructional access, development, learning, and economic wellbeing

“…Specifically, we computed estimates under more modest and optimistic returns to education of 4, 8, and 10% per year of schooling, respectively, as well as with 0% and 3% net discounting of future benefits. In recent history, real interest rates have fluctuated between 0% and 5% (Borio et al, 2017), while real wage growth rates have been approximately 2% (Inclusive Labour Markets, 2015). The 0% scenario essentially assumes that real interest rates equal future real wage growth rates; the 3% net discounting scenario assumes that future interest rates will be 3% higher than real wage growth rates (i.e., wage growth rates net of inflation).…”