A New Normal for Interest Rates?

Global trends in interest rates

Del Negro and al. found that the trend in the world real interest rate was stable around values a bit below 2.0 percent through the 1940s. It rose gradually after World War II, peaking at close to 2.5 percent around 1980, but has been declining ever since, dipping to about 0.5 percent in 2016, the last year of available data. They attribute this latest decline to a secular phenomenon driven by global forces that emerged well before the Great Recession and that are unlikely to be connected to country-specific factors, such as national policies or other domestic developments.

Therefore, whatever forces might lift real interest rates in the future must be global, such as a sustained pickup in world economic growth, or a better alignment of global supply and demand with respect to safe and liquid assets.

Global Trends in Interest Rates
By: Marco Del Negro, Domenico Giannone, Marc P. Giannoni, Andrea Tambalotti, Brandyn Bok, Eric Qian – Federal Reserve Bank of New York

The case of US interest rates

Christensen and Rudebusch use dynamic term structure models and the prices of inflation-indexed debt, namely, U.S. Treasury Inflation-Protected Securities, to construct a finance-based measure of the natural rate. They argue that the main advantage of their measure of equilibrium rate is that it does not depend on obtaining a correct specification of the output and inflation dynamics. They too find that the longer-run equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.
A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt
Authors: Jens H. E. Christensen, Glenn D. Rudebusch
From: Federal Reserve Bank of San Francisco