Global Real Rates: A Secular Approach

Global Real Rates: A Secular Approach

Pierre-Olivier Gourinchas1 H?el`ene Rey2

1UC Berkeley & NBER & CEPR 2London Business School & NBER & CEPR

FRBSF Fed, April 2017

Prepared for the conference "Do Changes in the Landscape Require a New Policy Framework?".

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The Questions We Address:

Why have global real interest rates declined so much?

Propose a simple empirical approach using the world budget constraint and historical data.

1. Gives us insights regarding the forces behind low frequency movements in real rates.

2. Allows us to forecast future global real rates.

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Global Interest Rates (10-year nominal yields)

percent 18

Financial Crisis Eurozone Crisis

16

14

12

10

8

6

4

2

0

-2 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

U.S. Germany U.K. Japan

Sources: U.S.: 10-year bond constant maturity rate; Germany: 10-year benchmark bond; U.K.: 10-year government bond yield; Japan: 10-year government bond yield. Global Financial Database

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U.S. Real Rates

percent 12 10 8 6 4 2 0 -2 -4 -6 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

90-day

3-year

5-year

10-year

Ex-ante real yields on U.S. Treasury Securities constructed using median expected price changes from the University of Michigan's Survey of Consumers. Source: FRED.

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.14

1875

1900

1925

1950

1975

2000

`Historical' U.S. Real Rates, 1871-2011

.20 .15 .10 .05 .00 -.05 -.10 -.15

1875

1900

sho rt term real inte rest rate (percent)

1925

1950

1975

2000

The figure reports the annualized ex-post real 3-month interest rate for the U.S. since 1871. Source: Jord`a et al (2016).

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