Working Paper - Low long-term interest rates as a global phenomenon - by Peter Hördahl, Jhuvesh Sobrun and Philip Turner
Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB
Website:www.bis.org
Introduction
Global interest rates are, according to Haldane (2015), now “lower than at any time in the past 5000 years”. As the former Governor of the Banque de France noted in his recent valedictory address, “the prolonged coincidence of low interest rates and low inflation…complicate the task of monetary policy…and worsen the trade-off between price and financial stability” (Noyer, 2016).
The review by Kotz and Le Cacheux (2016) makes it clear that we cannot disentangle precisely what is secular and what is cyclical in such an extraordinary development. Nor can we be sure about the relative importance of monetary and non-monetary factors. The depth and tenacity of the long post-financial-crisis period has raised fundamental, and unresolved, questions about current macroeconomic theory. Aglietta (2016) and King (2016) both underline the importance of ‘radical uncertainty,’ which can lead to oversaving. Ragot (2016) lucidly explains how inadequate aggregate demand and very low inflation have led to a recent revival of the classical theories of Keynes’s nominal rigidities (eg paradox of thrift).
Some stress the precautionary saving of workers. How households who face borrowing constraints react to cyclical movements in uninsurable unemployment risk might be of crucial macroeconomic importance even if such households hold only a small proportion of aggregate wealth (Challe and Ragot, 2015). Other writers focus on saving for retirement. They stress how a prolonged period of zero interest rates on “safe” assets – engineered by central banks – could make households more insecure financially about their ability to finance their retirement and even reduce spending (Artus, 2016, and Thimann, 2016). For all these reasons, we have yet to understand the macroeconomic causes of oversaving (or underinvestment) – let alone other possible causes. There is, therefore, no simple answer to the question: what is the “new normal” for interest rates? Faust and Leeper (2015) have argued persuasively that oversimplifying complex dynamics and assuming reversion to some “normal” levels for the policy rate or for term premia in bond markets can lead to policy mistakes. Because monetary conditions depend on interest rates at various maturities, it is essential to analyse the shape of the yield curve.
The analysis in this paper will make use of three constructed variables – a shadow policy rate, the natural interest rate and the term premium in the long-term interest rate – to analyse the long-term interest rate. With more stable benchmark policy rates (and stuck at near zero since 2009), long rates have become more important in the global transmission of monetary policy. This is particularly true for emerging market (EM) economies. When most EM foreign borrowing by the private sector took the form of bank loans carrying short-term dollar interest rates, the Federal funds rate was the dominant external monetary influence on financial conditions in the emerging market economies. Many empirical studies on EMs therefore took this interest rate as the best single measure of the “foreign” interest rate. But such reliance on a single interest rate has become ever more misleading.
The greater use of international and domestic bond markets has made emerging market economies much more sensitive to changes in long-term rates. BIS (2007) analysed the early phases of this development, and Sobrun and Turner (2015) document the further evolution in recent years. Many emerging markets have now joined the advanced economies in having market-driven long-term interest rates in their own currencies – usually in their domestic government bond market: see the country studies in BIS (2014).
Copyright: Centralbahnplatz 2 4051 Basel
Switzerland BISBCHBB
Website:www.bis.org
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