Decline In Real Interest Rates Research Articles

The Pre-Great Recession Slowdown in Productivity

In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.

The Pre-Great Recession Slowdown in Productivity

In the years since the Great Recession, many observers have highlighted the slow pace of productivity growth around the world. For the United States and Europe, we highlight that this slow pace began prior to the Great Recession. The timing thus suggests that it is important to consider factors other than just the deep crisis itself or policy changes since the crisis. For the United States, at the frontier of knowledge, there was a burst of innovation and reallocation related to the production and use of information technology in the second half of the 1990s and the early 2000s. That burst ran its course prior to the Great Recession. Continental European economies were falling back relative to that frontier at varying rates since the mid-1990s. We provide VAR and panel-data evidence that changes in real interest rates have influenced productivity dynamics in this period. In particular, the sharp decline in real interest rates that took place in Italy and Spain seem to have triggered unfavorable resource reallocations that were large enough to reduce the level of total factor productivity, consistent with recent theories and firm-level evidence.

Targets, Interest Rates, and Household Saving in Urban China

This paper studies a panel of China's provinces over the period 1996-2009 during which urban household saving rates increased from 19 percent of disposable income to 30 percent. It finds that the increase in urban saving rates is negatively associated with the decline in real interest rates over this period. This negative association suggests that Chinese households save with a target level of saving in mind. When the return to saving declines (increases), it becomes more difficult (easier) to meet a target and households increase (lower) their saving out of current disposable income to compensate. The results are robust across specifications and to the inclusion of additional variables. A main policy implication is that an increase in real deposit rates may help lower household saving and boost domestic consumption.

Dealing with global ageing and declining world interest rates: Fiscal costs and pension reform in small open economies

How will the worldwide decline in real interest rates associated with global ageing affect small open economies (SOEs) with ageing populations? Lower interest rates will result in higher capital–labor ratios and increased wages. Higher wages will be passed on to pension benefits, exacerbating ageing-related fiscal pressures, increasing taxation and reducing consumption and welfare. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. The article illustrates the interest rates transmission mechanism and its interaction with pension indexation. In addition, the article evaluates the capacity of pension reforms to mitigate the effects of long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, protect SOEs against world interest rate changes. These results serve to strengthen policymakers’ case for indexation-switching pension reforms.

Housing and the Global Financial Crisis: US versus Australia

AbstractIn the housing cycle which started in 1996, Australian house prices have risen more than those in the US, prima facie suggesting that Australian prices should fall sharply. This paper questions that simple hypothesis. The reasons explored are: Australian prices have risen significantly less than those in coastal California, the more valid comparison; the Australian housing finance system contains fewer of the structural weaknesses of the US system; fundamentals in the form of the decline in real interest rates explain most, but not all, of the price rise; and macroeconomic conditions for housing in Australia are more favourable to weathering the global financial crisis.

Commodity prices, interest rates and the dollar

This paper sheds light on recent fluctuations in commodity prices. We investigate whether a decline in real interest rates and the US dollar contributes to higher commodity prices, and whether commodity prices display overshooting behavior in response to changes in real interest rates. We analyze the behavior of real prices of crude oil, food, metals and industrial raw materials. The analysis is based on structural VAR models estimated on quarterly data over the period 1990q1–2007q4. Our results suggest that commodity prices increase significantly in response to reductions in real interest rates. Moreover, oil prices and prices of industrial raw materials tend to display overshooting behavior in response to such interest rate changes. The evidence also suggests that a weaker dollar leads to higher commodity prices. Shocks to interest rates and the dollar are found to account for substantial shares of fluctuations in commodity prices.

Global Aging and Declining World Interest Rates: Macroeconomic Insurance Through Pension Reform in Cyprus

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Global Aging and Declining World Interest Rates: Macroeconomic Insurance through Pension Reform in Cyprus

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Is Your Bubble About to Burst?

House prices have risen quite sharply since 2000. Coming on the heels of a stock market crash, many analysts have raised the specter of collapse in house prices and have conjured up dire consequences from such a collapse. This article examines the extent of the house price rise, whether there are factors that account for it, whether prices are likely to collapse, and if they did, the macroeconomic consequences of such a decline. It suggests that the rise in prices was due to fundamental economic changes, especially a decline in real interest rates. A sharp decline in the national average price is unprecedented, but national prices have declined slowly relative to other goods and services, not by falling, but rather by failing to rise as rapidly as other prices. This has happened twice in the last twenty-five years and is likely to be the pattern in coming years, if prices return to some past average relationship. Finally the article discusses the economic consequences of a house price collapse and argues that the recessionary implications of a price bust would be minimal. There are three main potential channels of influence, a banking sector crisis due to mortgage defaults, a decline in consumer spending as households attempt to rebuild wealth, and a decline in home building in response to diminished sales. The article argues that none of these possibilities are likely, even in the unlikely event of a major price collapse.

Treasury Bill Rates in the 1970s and 1980s

As is widely recognized, real interest rates in the early 1980s were at peaks not witnessed since the late 1920s. Less well perceived is the sharp decline in real interest rates in the middle 1980s to their average levels of the previous quarter century. This paper seeks to identify the underlying determinants of the major movements in real six-month Treasury bill rates. The primary innovation is the development of a new monetary policy proxy that explains much of the real rate movement in the 1980s.

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Interest Rates and Foreign Capital in Egypt Under British Occupation

My archival studies in Egyptian banks reveal that nominal interest rates charged by foreign financial capital in Egypt fell strongly as compared with European rates throughout the period 1882–1914. Interest differentials declined by 2 to 2 ½ percent. This is explained by the increasing confidence of European investors with British occupation and policies. To explain the large inflow of financial capital after 1900 a sharp decline in real interest rates, related to the upsurge of agricultural prices, is posited. The case offers interesting parallels to present-day problems of excessive indebtedness in Third World countries.