Sunday, 17 January 2016
Towards a global narrative on long-term real interest rates - The policy implications of persistently low real interest rates are extensive. If the global equilibrium real rate is at or slightly below 1%, then for countries with a 2% inflation target, equilibrium nominal interest rates in individual countries may eventually settle at or below 3% – considerably lower than the historic norm. In the face of adverse shocks, central banks may therefore be more likely to run up against the zero lower bound on nominal interest rates, requiring the use of unconventional policy instruments such as quantitative easing (QE) more often. However, uncertainties over the transmission of QE and concerns over the size of central bank balance sheets might limit the use of such tools in the future. For large adverse shocks, fiscal policy may therefore need to bear more of the burden of business-cycle management. Low rates may also fuel search-for-yield behaviour, posing challenges for macro- and microprudential policymakers. Overall, the possibility of the global equilibrium rate remaining at persistently low levels should motivate a real debate across the policy spectrum on the best approach to stabilise the cycle in the future.