3CHAPTER PERSPECTIVES ON GLOBAL REAL INTEREST RATES

Real interest rates worldwide have declined substantially since the 1980s and are now in slightly negative territory. Common factors account for much of these movements, highlighting the relevance of global patterns in saving and investment. Since the late 1990s, three factors appear to account for most of the decline. First, a steady increase in income growth in emerging market economies during 2000–07 led to substantially higher saving rates in these economies. Second, the demand for safe assets increased, largely reflecting the rapid reserve accumulation in some emerging market economies and increases in the riskiness of equity relative to bonds. Third, there has been a sharp and persistent decline in investment rates in advanced economies since the global financial crisis. This chapter argues that global real interest rates can be expected to rise in the medium term, but only moderately, since these three factors are unlikely to reverse substantially. The zero lower bound on nominal interest rates will remain a concern for some time: real interest rates will likely remain low enough for the zero lower bound to reemerge should risks of very low growth in advanced economies materialize. In the past few years, many borrowers w ith good credit ratings have enjoyed a cost of debt close to zero or even negative when it is adjusted for infl ation. Th is is not just a consequence of the global fi nancial crisis. Since the early 1980s, yields of all maturities have declined worldwide well beyond the decline in infl a-tion (Figure 3.1). However, because the recent interest rate declines refl ect, to a large extent, weak economic conditions in advanced economies after the crisis, some reversal is likely as these economies return to a more normal state. But how much of a reversal? Certain factors suggest a substantial increase in interest rates in the medium term: high and rising debt levels in advanced economies; population aging; lower growth in emerg-ing market economies, which might lower their saving rates; and further fi nancial deepening in emerging market economies, which would reduce borrowing constraints and thereby net saving.1 Other factors, however, would work in the opposite direction: long-lasting negative eff ects of the global fi nancial crisis o