The Global Equilibrium Real Interest Rate: Concepts, Estimates, and Challenges

Abstract

Real interest rates have been persistently below historical norms over the past decade, leading economists and policymakers to view the equilibrium real interest rate as likely to be low for some time. Various definitions and approaches to estimating the equilibrium real interest rate are examined, including approaches based on the term-structure of interest rates and small macroeconomic models. The individual-country approaches common in the literature are extended to allow for global trend and cyclical factors. The analysis finds that global factors dominate the downward trend in the equilibrium interest rate across 13 advanced economies. A corollary of this finding is that the U.S. equilibrium rate may be substantially lower than estimated in U.S.-only studies. The analysis also highlights how the common global trend confounds empirical assessments of the determinants of movements in the equilibrium rate and the need to better integrate term-structure and macroeconomic approaches.

Do Financial Markets Allow the Independence of Central Banks?

“…The COVID-19 pandemic has further evidenced and accelerated the great dependence of the financial markets on the extraordinary measures of central banks. As expressed by the former Federal Reserve Chairman Ben Bernanke, who suggests that the use of monetary policy rules must change if monetary policy is to remain relevant, warning that if short-term rates are constrained, this will have serious consequences for the development of the real economy (Bernanke, 2020;Kiley, 2014Kiley, , 2018Kiley, , and 2019.…”