On the international co-movement of natural interest rates

Using quarterly data for 10 OECD countries and the Euro area and a Kalman filtering technique, we investigate the international co-movement among natural interest rates. We show that the US is the main source of global spillovers and global/common factors appear to be key drivers of such co-movement. Indeed, global liquidity is a net transmitter of shocks, while quantitative easing (QE) and the US Dollar are net recipients of shocks. We also find that total spillovers among natural interest rates have been rising since the late nineties, spiking at around economic recessions, periods of US monetary policy tightening, the global financial crisis and the Eurozone sovereign debt crisis. From a policy perspective, our findings suggest: (i) the need of more monetary policy coordination among countries to tackle common drivers of natural rates; (ii) the importance of complementing monetary policy with macro-financial stabilisation tools to ease the global constraints that it faces; (iii) a very gradual and uncertain monetary normalisation path, subject to spikes in financial markets' volatility; and (iv) a (lower) “new normal” level for real policy rates.