Long-term Real Interest Rates Research Articles

The Questionable Effectiveness and Efficiency of the New Public Policies

In this paper we deal with the recent (1995-2023) Federal Reserve operated monetary policies, which were two unprecedented and distinct monetary policy regimes. The inflation stabilization era (1995-2008) and the zero-interest rate era (December 15, 2008-December 15, 2015) and again (March 15, 2020-March 15, 2022).These different monetary policy regimes provided various outcomes for interest rates, financial markets, inflation, cost of living, employment, international trade, and real economic growth. Then, a new fiscal policy was imposed in 2020. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets (bubbles), and very little the real economic growth. The Fed’s interest rate target was set during these nine years at 0% to 0.25%.It has created a low level of long-term interest rates and the negative real rate of interest (cost of capital). The evidence suggests that these public policies are not very effective; they have created a new bubble in the financial market, future inflation, and a redistribution of wealth from riskaverse savers to banks and risk-taker speculators. This monetary policy has increased the risk (RP) to the risk-averse depositors by making the real rate of interest negative. The effects on growth and employment of both public policies (monetary and fiscal) were gradual, small, and questionable, due to exaggerated liquidity, outsourcing, COVID-19, liberalism, high cost of production, the “environment”, enormous debts, and unfair trade policies.

Major Macroeconomic Variables, Monetary Policy, and the Determination of the Neutral Interest Rate in Brazil

This research used ARDL methodology to explore relevant macroeconomic variables influence on the Brazilian neutral interest rate. As a non-observable variable, we used this approach to identify the determinants of neutral interest rate in the Brazilian economy not only in the short term but also in the long run. Our descriptive analysis highlights that the trend of the real interest rate in Brazil has also been decreasing in recent years. In this paper we attempt to identify which variables could have driven such a fall. We used monthly data from January/2003 to June/2021 and the macroeconomic variables investigated are described as follows: neutral real interest rate (NRI), inflation rate (INF), 3-month treasury bill rate (TB3MS), real exchange rate (EER), Economic Activity Index (IBC-Br). All data were collected from IBGE, IPEADATA and Central Bank of Brazil (BACEN). We achieve that the variables that positively influence the long-term real interest rate are the inflation rate followed by the global interest rate trajectory and the real exchange rate, respectively. On the other hand, economic growth according to its potential level has a negative and relevant impact on the real long-term interest rate.

The impact of monetary variables on achieving economic growth - Bahrain as a model for the period (1995-2020)

This research aims to highlight the role of monetary economic variables in achieving economic growth in Bahrain, depending on the program, EViews10. The static test was used through the application of the expanded Dicke-Fuller test. The research found that 86% of the changes that occur in economic growth are explained by the variables The independent input into the model and the remainder due to variables that were not included in the model. The results of the research showed an inverse relationship between the long-term real interest rate with GDP, and a direct relationship between each of the short-term real interest rate with GDP The total, and a direct relationship between the broad money supply, and the rate of inflation, with the gross domestic product.

The Impact of Fiscal Rules on the Fiscal Deficit for Ten Countries of the European Union -Empirical Analysis for the Period 1995-2020

This paper analyzes whether fiscal rules impact improved budget performance and fiscal discipline in the ten EU nations with the largest average fiscal deficit from 1995 to 2020. Fiscal performance will be reflected through the fiscal deficit adjusted for cyclical economic periods. The independent variables are real long-term interest rates, fiscal rules, public debt (expressed as a percentage of GDP), government effectiveness, and government spending (expressed as a percentage of GDP). The methodology used consists of empirical panel data through the OLS econometric model. With this model we have analyzed the responsiveness of the fiscal deficit, which have applied fiscal rules, by incorporating in the model other factors as well. The empirical results shows that fiscal rules, public debt, government effectiveness, and government spending statistically significantly impact the fiscal deficit. At the same time, the real long-term interest rate did not reach the level of statistical significance based on the model results.

OECD countries’ twin long-run challenge: The impact of aging dynamics and increasing natural disasters on savings ratios

AbstractThere has been a long-standing debate over the development of savings rates in developed economies, and an emphasis has been placed on aging societies and a global savings glut. Meanwhile, with rising global temperatures and more frequent extreme weather events becoming an increasingly visible economic and ecological global challenge, the concern of climate-related risks could indeed be an important issue in monetary and real economic analysis. This study aims to investigate the dual long-term challenge of sustainable economic development. By constructing an enhanced growth model and investigating empirically, using a panel approach which employs data from OECD countries between 1980 and 2020, the question as to the extent to which the savings rate is affected by aging populations and environmental degradation will be addressed in a broad macro perspective. This study explores for the first time the impact of natural disasters on OECD countries and the main findings indicate that aging populations and natural disasters have significant negative impacts on savings rates. Moreover, the analyses using sub-samples suggest a diminishing role of the real long-term interest rate regarding savings behaviour.

Research on the influence mechanism of China’s industrial circulation on long-term interest rate: Empirical analysis based on VEC model

As the adjustment space of China’s monetary policy is gradually expanding and the adjustment intensity is gradually increasing, the influence of external factors on money supply and demand is gradually weakening. The endogenous mechanism of interest rate in the real economy needs to be further explored. Through the long-term interest rate model, the paper reveals the relationship between the circulation status of real economy and long-term interest rate. Based on the monthly data of China from 2003 to 2019, the paper establishes the error-correction VEC model and the state-space model to conduct empirical test and analysis on the influence mechanism of long-term interest rate. The final results show that exogenous factors such as monetary policy have certain influence on interest rate in the short run, while in the long run, interest rate is affected by the average circulation of goods described by the inventory increment of manufacturers and the actual production input of enterprises.

Financial and Total Wealth Inequality with Declining Interest Rates

Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with unanticipated lower real rates, households which rely more on financial wealth must see large capital gains to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for house-hold welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed in-crease in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration.

The global saving glut and the fall in U.S. real interest rates: A 15-year retrospective

The authors revisit Ben Bernanke’s global saving glut (GSG) hypothesis from 2005—which links low long-term real interest rates in the United States to excess saving in a number of non-Western countries, including, but not limited to, China. Using an analytical framework and empirical data, they find that the ability of the GSG hypothesis to explain the fall in long-term real rates between 2002 and 2006 is likely much greater than its ability to account for the further fall in these rates from the Great Recession onward.

Financial and Total Wealth Inequality with Declining Interest Rates

Financial wealth inequality and long-term real interest rates track each other closely over the post-war period. Faced with unanticipated lower real rates, households which rely more on financial wealth must see large capital gains to afford the consumption that they planned before the decline in rates. Lower rates beget higher financial wealth inequality. Inequality in total wealth, the sum of financial and human wealth and the relevant concept for house-hold welfare, rises much less than financial wealth inequality and even declines at the top of the wealth distribution. A standard incomplete markets model reproduces the observed in-crease in financial wealth inequality in response to a decline in real interest rates because high financial-wealth households have a financial portfolio with high duration. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

CAPE and the COVID-19 Pandemic Effect

Campbell & Shiller’s Cyclically-Adjusted-Price to Earnings ratio (CAPE), is well-known to characterize the strong relationship between an inflation adjusted earnings-price ratio and subsequent long-term returns, as first highlighted in their 1988 paper "stock prices, earnings and expected dividends". It has now become an often cited and followed measure of long-term equity market valuation.In this paper, we specifically examine how the ¢ape ratio has behaved over the COVID-19 pandemic period, referred to as the pandemic for shorthand hereafter, and we also extend our analysis beyond the United States (US) equity benchmark, to also look at the CAPE ratios for the United Kingdom (UK), Europe, Japan and China, to analyse the effect of the pandemic across the major equity markets globally. We investigate the CAPE ratios of these equity markets relative to the respective long-term interest rates markets and develop a measure which may be revealing to understand the current demand for equities relative to the alternative of long-term bonds.With the CAPE ratio now synonymous with long-term equity market valuations, its use as a tool to forecast equity market returns to form return expectations for the equities part of the portfolio is now relatively commonplace. As such, we show changes in such return expectations pre-pandemic versus current, across the regions, to highlight the impact of pandemic. An extension to this forecast was presented in Shiller (2015) where excess real returns of stocks over bonds were found to be influenced by both CAPE and real long-term interest rates, where this relationship had an R2 of 0.41. We therefore also extend the forecasts made to investigate the changes in excess real return of stocks over bonds pre-pandemic versus current, across the major equity markets to try and shed light on investors' strong preferences for equites over bonds during this pandemic.Lastly, to dissect some of the driving forces of the respective equity markets over the pandemic, we look to sector dynamics within each respective economy. Edwards & Lazzara (2019) recently highlight the important role that sector dynamics can play in the returns of equity market country indices and as such, understanding these dynamics is especially important over the pandemic when comparing the relative performance of international markets.

Public Debt, Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries

We investigate the causal relationship between the public debt to GDP ratio and economic growth for 31 EU and OECD countries from 1995 to 2013. A number of studies have tackled this problem, but very few make the transmission mechanism explicit in their analysis. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and economic growth. We find no causal link from the public debt to GDP ratio to the GDP growth rate, irrespective of the levels of public debt. Rather, we find a causal relation from the GDP growth rate to the public debt to GDP ratio. In high-debt countries, the direct negative impact of economic growth on public debt is enhanced by a rise in the long-term real interest rate, which in turn decreases interest-sensitive demand and leads to a further increase in the public debt to GDP ratio.

Has the Financial Crisis affected the Real Interest Rate Dynamics in Europe?

We investigate the effects of the financial crisis on the stationarity of real interest rates for a group of Euro area countries. We use a new unit root test developed by Pesaran et al. (J Econom 115(1): 53–74, 2013) that allows for multiple unobserved factors in a panel set up. In this multifactor framework, we make use of a number of additional variables such as the stock price volatility and monetary policy expectations that are assumed to share common factors with the real interest rate. Based on recursive (Pesaran et al. 2013) test statistics, our results suggest that while short-term and long-term real interest rates were stationary before the financial crisis, they became non-stationary during the crisis period. Robustness analysis shows that the results are not sensitive to the use of ex-post real interest rates versus ex-ante real interest rates.

What is structural about unemployment in OECD countries?

While established estimates of ‘structural’ unemployment are regularly assumed to be a valid proxy for their unobservable theoretical postulate, this paper sets out to study their actual econometric determinants. Based on a data set for 23 OECD countries over the time period 1985–2013, the panel regression results suggest that standard institutional labor market indicators – such as employment protection legislation, trade union density, tax wedge, minimum wages – largely underperform in explaining measures of ‘structural’ unemployment, but macroeconomic factors – in particular capital accumulation, but also the long-term real interest rate – are essential determinants. The available macroeconometric evidence does not support the view that labor market institutions are at the heart of increased ‘structural’ unemployment in OECD economies. To understand the development of unemployment in OECD countries, researchers and policy-makers should primarily consider macroeconomic factors and focus on capital accumulation.

Public Debt, Economic Growth and the Real Interest Rate: A Panel VAR Approach to EU and OECD Countries

ABSTRACTWe investigate the causal relationship between public debt ratios and economic growth rates for 31 EU and OECD countries. We estimate a panel VAR model that incorporates the long-term real interest rate on government bonds as a vehicle to transmit shocks in both the public debt to GDP ratio and the economic growth rate. We find no causal link from public debt to growth, irrespective of the levels of the public debt ratio. Rather, we find a causal relationship from growth to public debt. In high-debt countries, the direct negative impact of growth on public debt is enhanced by an increase in the long-term real interest rate, which in its turn decreases interest-sensitive demand and leads to a further increase in the public debt ratio.

Monetary Policy: Is the Dual Mandate of the Fed Maximizing the Social Welfare?

In this work we deal mostly with the recent (2008-present) Federal Reserve operated monetary policies, which are two unprecedented and distinct monetary policy regimes. The Zero Interest Rate Regime (2008:12-2015:11) and the New Regime (2015:12-2018:12). These different monetary policy regimes provided various outcomes for inflation, interest rates, financial markets, personal consumption, personal savings, real economic growth, and social welfare. Some of the important results are that monetary policy appears to be able to affect long-term real interest rates, risk, the prices of the financial assets, and very little the real personal consumption, personal savings, and the real economic growth during the recent period of extreme monetary policy, in which the Fed held short-term interest rates abnormally low for an extended period (2008-2015) and the present time, which keeps the federal funds rate below the inflation rate. The Fed’s interest rate target was set during those seven years at 0% to 0.25%. On December 16, 2015, the Fed started increasing the target rate by 25 basis points approximately in each FOMC meeting, from 0.25% to 0.50% to 0.75%, and presently to 2.50%. We want to explain the low level of long-term interest rates and the real rate of interest (cost of capital) in the economy. The evidence suggests that it is the Fed the main cause of the low (negative) real interest rate following the 2007-2008 financial crisis. This monetary policy was not very effective (the zero interest rate target of the Fed). It has created a new bubble in the financial market, future inflation, and a redistribution of wealth from risk-averse savers to banks and risk-taker speculators. In addition, it has increased the risk (RP) by making the real risk-free rate of interest negative. The effects on growth, prices, and employment were gradual and very small, due to outsourcing and unfair trade policies, which have affected negatively the social welfare. The dual mandate (price stability and maximum employment) of the Fed is not sufficient to maximize the social welfare of the country.

A new test for fiscal sustainability with endogenous sovereign bond yields: Evidence for EU economies

In this paper we develop a new test for fiscal sustainability and propose a synthetic fiscal sustainability indicator. Conventional tests based on fiscal reaction functions assume a constant real interest rate. However, many empirical studies find evidence on a positive response of long-term rates to sovereign debt levels. We take this evidence into account and endogenize the long-term real interest rate in testing fiscal sustainability. We apply the new test for the European economies. We find that considering the response of interest rate to debt may change the assessment of fiscal sustainability. More specifically, our results indicate that fiscal sustainability is at risk in a number of European Union economies, even if the results of traditional approaches suggest sustainable fiscal policy.

Measuring Financial Cycle Time

Motivated by the traditional business cycle approach of Burns and Mitchell (1946), we explore cyclical similarities in financial conditions over time in order to improve our understanding of financial cycles. Looking back at 120 years of data, we find that financial cycles exhibit behaviour characterised by recurrent, endogenous swings in financial conditions, which result in costly booms and busts. Yet the recurrent nature of such swings may not appear so obvious when looking at conventionally plotted time-series data (that is, observed in calendar time). Using the pioneering framework developed by Stock (1987), we offer a new statistical characterisation of the financial cycle using a continuous-time autoregressive model subject to time deformation (ie the difference between the time scale relevant for economic decision-making and conventional calendar time such as months, quarters and years), and test for systematic differences between calendar and a new notion of financial cycle time. We find the time deformation to be statistically significant, and associated with levels of long-term real interest rates, inflation volatility and the perceived riskiness of the macro-financial environment. Implications for statistical modelling, endogenous risk-taking economic behaviour and policy are highlighted.

Monetary Policy and Long-Term Real Interest Rates in Brazil

This paper studies the sensitivity of long-term real rates to monetary policy in Brazil. Based on the response of long-term real rates to monetary policy decisions, it is found that monetary factors have little power over long-term rates, with 100 basis points unexpected hike in the policy rate leading to an increase in long-term real rates of 12 basis points. The results are consistent with the classical view of interest rates, in which the real rate of the economy in the long run is determined by real fundamentals and largely unrelated to monetary factors.

Hysteresis and labour market institutions. Evidence from the UK and the Netherlands

This paper uses data for the UK and the Netherlands (1983q4–2011q4) to test if hysteresis occurs in these economies, and through what mechanisms. The novelty of the paper resides in the use of a VAR-IRF that encompasses previous hysteresis studies, using long-term unemployment, productivity, capital stock and real long-term interest rates, and in the use of specific Labour Market Institutions shocks, such as benefits, taxation or unions’ power. This allows us to disentangle what specific demand and supply-variables affect unemployment in the long-run, i.e. the NAIRU. Our findings suggest that there is hysteresis in both countries, and that it happens through several channels. Further, we find that the influence of Labour Market Institutions on unemployment depend on their impact on the real wages-productivity gap. These results have implications for structural and macroeconomic policies that we also discuss. Finally, we investigate the impact of different supply and demand-shock on long-term unemployment and discuss the relevant policy implications.

Determinants of Debt and Economic Regulation: An Analysis of Brazilian Regulated Infrastructure Firms

This paper examines whether or not firms in regulated sectors present different indebtedness levels in comparison to firms in unregulated sectors, that is, whether or not an economically regulated environment impacts a firm’s indebtedness level. We present an analysis of panel data for a sample of Brazilian regulated and unregulated firms. After controlling for the variables recommended by the empirical literature addressing capital structure, our evidence shows that regulated firms engage in more indebtedness relative to unregulated ones, most prominently in the long-term, with some short-term exceptions idiosyncratic to the Brazilian experience. Profitability is a robust attribute of Brazilian firm indebtedness with a negative and significant impact both in the short- and long-term, and the regulated long-term real interest rate has a significant negative impact on long-term firm indebtedness.