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Understanding low interest rates: evidence from Japan, Euro Area, United States and United Kingdom

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  • Agnieszka Gehringer
  • Thomas Mayer

Abstract

The paper investigates the factors determining long‐term interest rates. Our estimation results for major industrialized economies suggest that central banks have actually had a key influence on the level of long‐term interest rates. We thus show that 1) the customary neoclassical model of interest rate determination, on which central banks tend to rely, is neither rooted in the institutional setup of the credit markets nor supported by the data, and that 2) the Austrian explanation incorporated in the model of Wicksell–Mises–Hayek of the credit and business cycle fits better the economic reality. As central bank policy makers might lack the necessary knowledge and foresight to set market rates to levels consistent with economic fundamentals, there is a high chance of misalignments of market rates. The correction of misalignments could lead to severe economic disruptions.

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  • Agnieszka Gehringer & Thomas Mayer, 2019. "Understanding low interest rates: evidence from Japan, Euro Area, United States and United Kingdom," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 28-53, February.
    • Handle: RePEc:bla:scotjp:v:66:y:2019:i:1:p:28-53
    DOI: 10.1111/sjpe.12176
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    1. Joscha Beckmann & Robert L. Czudaj & Gary Koop, 2019. "An empirical assessment of recent challenges in today's financial markets," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 1-4, February.
    2. van Riet Ad, 2019. "Monetary Policy and Unnatural Low Interest Rates: Secular Stagnation or Financial Repression?," Review of Economics, De Gruyter, vol. 70(2), pages 99-135, August.
    3. Hernán D. Seoane, 2020. "The Real Interest Rates Across Monetary Policy Regimes," EconPol Policy Reports 22, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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