why are real interest rates so low? - banque de …2017/01/20  · why are real interest rates so...

Why Are Real Interest Rates So Low?

M. MarxBanque de France

B. MojonBanque de France

F. R. VeldeFederal Reserve Bank of Chicago

January, 2017Why Are Real Interest Rates So Low? 1

Real interest rates r trend downfrom 2.5% in 1990 to -1.5% today

Why Are Real Interest Rates So Low? 2

The Deleveraging model of free fall r(Eggertsson and Krugman)

Why Are Real Interest Rates So Low? 3

The return on capital rK is flatrK= (value added - labor income) / the stock of capital

Why Are Real Interest Rates So Low? 4

The risk premium has increasedin 2016 the return on physical capital rK is 10 % higher than the return on bonds r

Why Are Real Interest Rates So Low? 5

The ”higher risk aversion”/ ”safe assets shortage” model ofincreased rK − rinvestors are ”desperate” for liquid/safe assets (Caballero, Farhi and Gourinchas)

Why Are Real Interest Rates So Low? 6

The discipline of a modelon the ”secular stagnation debate”

we assess quantitatively the role ofI ageingI slower productivityI deleveragingI rising risk aversion/shortage of safe assets

the model includesI young borrow as much as they can from middle-agedI middle-aged lend to young, buy capital from oldI old collect returns, sell capital

Why Are Real Interest Rates So Low? 7

Long term determinantsof the bond interest rate r and the return on capital rK

Observable factorsI productivity growth gAI evolution of working age population gL

Unobservable factorsI borrowing constraint θI risk defined as uncertainty on the level of productivity σ

r = r0 + gL+

+ gA+

+3θ

10+

+ φ(θ|σ+, σ−

)

rK = r(θ+, σ−

) + ξ(θ|σ−, σ+

)

Why Are Real Interest Rates So Low? 8

The effects of ”observable” factors : ageing, productivityexplain about 1.5% of the decrease in r since 1990, cannot explain the risk premium

Why Are Real Interest Rates So Low? 9

Impact of the borrowing constrainta tighter constraint can account for the fall in r and 1% increase in rK − r since 1990

Why Are Real Interest Rates So Low? 10

Impact of the riska higher risk perception can account for the fall in r and the increase in rK − r since 1990

Why Are Real Interest Rates So Low? 11

Impact of the risk and the borrowing constraintwith a higher risk perception, data are consistent with non decreasing debts

Why Are Real Interest Rates So Low? 12

Conclusion

Among the usual suspects of the secular stagnation debate, determinantsof ”savings” explain the lion share of why real rates are so low

some ageing (reduce r only by -0.9%)

some productivity slowdown (reduce r only by -0.6%)

higher risk aversion/perception can explain the entire decline in r andincrease in rK − r since 1990

deleveraging is not a necessary ingredient of the fall in r

Why Are Real Interest Rates So Low? 13

Additional slides

Why Are Real Interest Rates So Low? 14

Observable factorsyoy growth rates in %

Why Are Real Interest Rates So Low? 15

Little evidence of the deleveraging in the data

Why Are Real Interest Rates So Low? 16