Dynamics and synchronization of global equilibrium interest rates

Abstract

ABSTRACT Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a larger set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well. Current estimates of the global equilibrium rate rely on only a few countries but estimates for a more diverse set of countries can improve understanding of its dynamics and drivers. This paper uses a model and estimation strategy that decompose ex-ante real interest rates into permanent and transitory components even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods. Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.