Determinants of global neutral interest rates

Abstract

We provide a comprehensive account of the determinants of global longer-run neutral interest rates—the real component of policy interest rates consistent with both economic activity and inflation at their longer-run trends. Using a cross-country model for 11 advanced economies in the 1960–2019 period, we simultaneously account for productivity, demographics, global supply of safe assets, demand factors for safe assets, and global spillovers faced by each economy from the rest of the world’s developments. We find two main results: safe asset supply is a major determinant of neutral rates, with its positive contribution since 2008 counteracting negative contributions from many other determinants, and global spillovers are important determinants of neutral rates’ trajectories and co-movements.