Commentary: Low Interest Rates: Causes and Consequences

World interest rates have been declining for several decades. In a general equilibrium setting, the interest rate is determined by the interaction of a number of types of behavior: the policy of the central bank, investment in productive assets, the choice between current and future consumption, and the responses of wealth holders to risk. Central banks devote consider effort to determining equilibrium real rates, around which they set their policy rates, though measuring the equilibrium rate is challenging. The real interest rate is also connected to the marginal product of capital, though the connection is loose. Similarly, the real interest rate is connected to consumption growth through a Euler equation, but again many other influences enter the relationship between the two variables. Finally, the idea of the “global saving glut” suggests that the rise of income in countries with high propensities to save may be a factor in the decline in real rates. That idea receives support in a simple model of global financial equilibrium between countries with risk tolerance (the United States) and ones with high risk aversion (China).