Must-Read Pre-Liftoff Lollapalooza: Lukasz Rachel and Thomas D Smith: Secular Drivers of the Global Real Interest Rate

Must-Read Pre-Liftoff Lollapalooza: As Larry Summers says, this fits neither Ben Bernanke’s ascription of low real interest rates to a transitory global savings glut caused by the political-insurance preferences of non-return maximizing market actors, nor Ken Rogoff’s belief that it is overwhelmingly the result of overleverage and the need for the unwinding phase of a debt supercycle. The cures proposed are then (i) higher target inflation rates, (ii) higher public debt levels, (iii) more mobilization of risk-bearing capacity in private-sector financial markets, (iv) redistribution, and (v) an international lender of last resort that emerging markets trust.

Lukasz Rachel and Thomas D Smith: Secular Drivers of the Global Real Interest Rate: “Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years…

…We think we can account for around 400 basis points of the 450 basis points fall… slowing global growth [is] one force… but shifts in saving and investment preferences appear more important… demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and… an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.