Eight Centuries of Global Real Interest Rates, R-G, and the ‘Suprasecular’ Decline, 1311–2018

Abstract

With recourse to archival, printed primary, and secondary sources, this paper reconstructs global real interest rates on an annual basis going back to the 14th century, covering 78% of advanced economy GDP over time. I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been 'stable', and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6-1.6 basis points per annum has prevailed. A gradual increase in real negative-yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend'-a trend that makes narratives about a 'secular stagnation' environment entirely misleading, and suggests that-irrespective of particular monetary and fiscal responses-real rates could soon enter permanently negative territory. I also posit that the return data here reflects a substantial share of 'non-human wealth' over time: the resulting R-G series derived from this data show a downward trend over the same timeframe: suggestions about the 'virtual stability' of capital returns, and the policy implications advanced by Piketty (2014) are in consequence equally unsubstantiated by the historical record.

Longer-Run Economic Consequences of Pandemics

“…The weighting followsSchmelzing (2020), but results are robust to alternative weightings and also hold when we employ country-specific estimation as shown below. Aggregation weights do not sway the result.…”

“…Robustness to possible major trend breaks. Schmelzing (2020) proposes three historical dates at which the trend for the real interest rate could have changed. These are the "post-Bullion famine" period following the end of the global monetary contraction (1494), the "North-Weingast" institutional revolution that led to emergence of credible public debt mechanisms in Britain (1694), and the "post-Napoleonic" founding of the modern international state system (1820).…”

“…Historical interest rates from 1314 to 2018 compiled bySchmelzing (2020) are available at the Bank of England's data repository, where further details on data sources are given. The dataset covers France (1387-2018), Germany (1326-2018), Italy (1314-2018), the Netherlands (1400-2018), Spain (1400-1729, 1800-2018), and the U.K. (1314-2018).…”

“…The European real natural rate and response after pandemics (a) European real natural rate of interest, Raw interest data fromSchmelzing (2020). The real rate is based on the model in Equation 3.…”

Public Debt and Low Interest Rates

“…Looking at 10-year inflation-indexed bonds, and using realized volatility as a proxy for implied volatility (option markets are not deep enough to derive implied volatility directly), suggests that the market puts the probability that the rate will be higher than 200 bp in five years around 5-15%. 41 In short, one can surely not exclude the possibility that debt will indeed be more costly in the future, and the safe rate may exceed the growth rate.…”