Low real interest rates: Causes and outlook

Over the past few decades, inflation has been driven down both in the world's developed countries and on a global scale, so much so that fears of deflation now outweigh concerns about imminent inflation. This development has driven nominal interest rates down as the interest rate inflation component expected by investors becomes smaller and smaller. What is striking, however, is that the drop in interest rates has been much more dramatic than the drop in inflation. Real interest rates are now exceptionally low on almost all of the major bond markets.

Can these low interest rates be attributed to long-term trends, as an analysis based on neoclassical models for explaining interest rates in terms of the supply and demand for savings would tend to suggest, or are they a monetary phenomenon, i.e. one determined by monetary policy and the overall credit market context? We do not believe that one-directional interest rate explanations are of much help. The theoretical idea that real interest rates cannot be influenced by monetary factors in the longer term, for example, would appear to us to be a hasty simplification. As a result, we have attempted to weigh up the main possible explanations for the drop in real interest rates.

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