Abstract
There is ample evidence that real interest rates have progressively declined and converged since the 1980s in most advanced and emerging economies, to stand currently at very low levels. The persistence of this trend and its intensification during the global financial crisis have raised a series of highly relevant issues in different areas. We follow a conceptual framework where global real interest rates are determined by the supply of (saving) and the demand for (investment) loanable funds at the global level. Against this background, this chapter analyses the determinants of this trend from a global perspective highlighting how globalisation and increasing financial integration, contributed to increase the influence of the emerging market economies since the beginning of this century. In the wake of the global financial crisis other factors in place were the subsequent reduction in the propensity to invest, the increase in precautionary saving, the introduction of non-standard monetary policies or the increase in income inequality. Looking forward, this chapter argues that the normalisation of monetary policies, the change in the growth model of certain emerging countries and the socio-demographic and productivity trends would point to a gradual recovery in real interest rates over a medium-term horizon, albeit with a high degree of uncertainty. Over the longer term, this trend may tail off against a background of limited technological progress or a sharper-than-expected decline in investment in the emerging economies.
This chapter is an updated version of the article of the same title published in the Banco de España Economic Bulletin, January 2016.
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Notes
- 1.
An alternative is to use the yields on inflation-indexed public debt instruments directly, but these are available only for a small number of economies and a very short period. Moreover, the markets for these assets are usually less liquid than those for traditional public debt, so that premiums may arise which complicate the interpretation of yields.
- 2.
Although financial integration had been increasing until the global financial crisis, during the period analysed there were significant restrictions on the mobility of capital flows, especially in emerging market economies, of which China is the best example. The consensus in the literature on international finance is that the advanced economies have closely interconnected capital markets, while the integration of the emerging market economies into the international financial system is more recent and limited. As a result, the implicit assumption of financial integration underlying the conceptual framework in which the interest rate is determined by the balance of the global supply and demand for funds needs to be considered with caution. Moreover, one possible side effect of the global financial crisis is an increase in financial fragmentation, which may reduce the importance of global factors in the determination of saving and investment at the global level.
- 3.
The differences between global saving and investment rates arise from statistical discrepancies.
- 4.
Saving and investment rates are calculated as nominal saving and investment, respectively, divided by nominal GDP. However, significant changes in relative prices must have occurred, since the price of investment goods shows a downward trend relative to the economy as a whole, which would lead to a higher investment rate at constant prices than in nominal terms.
- 5.
- 6.
Rawdanowicz et al. (2017) find little robust evidence about the role of proxies of the supply of and demand for government bonds to explain real interest rates. However, they find that real government bond yields are closely linked with real policy interest rates.
- 7.
The ratio between the population aged under15 and over 64 and the population aged between 15 and 64.
- 8.
See Berganza et al. (2015) for an analysis of the factors explaining the weakness of investment in the advanced economies.
- 9.
Problems related to the measurement of investment, stemming, for example, from the increasing importance of intangible assets and their possible undervaluation in the national accounts, would limit the decline in the observed investment rate.
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Hernando, I., Santabárbara, D., Vallés, J. (2018). The Global Real Interest Rate: Past Developments and Outlook. In: Ferrara, L., Hernando, I., Marconi, D. (eds) International Macroeconomics in the Wake of the Global Financial Crisis. Financial and Monetary Policy Studies, vol 46. Springer, Cham. https://doi.org/10.1007/978-3-319-79075-6_11
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