The Global Real Interest Rate: Past Developments and Outlook

There is ample evidence that real interest rates have progressively declined and converged since the 1980s in most advanced and emerging economies, to stand currently at very low levels. The persistence of this trend and its intensification during the global financial crisis have raised a series of highly relevant issues in different areas. We follow a conceptual framework where global real interest rates are determined by the supply of (saving) and the demand for (investment) loanable funds at the global level. Against this background, this chapter analyses the determinants of this trend from a global perspective highlighting how globalisation and increasing financial integration, contributed to increase the influence of the emerging market economies since the beginning of this century. In the wake of the global financial crisis other factors in place were the subsequent reduction in the propensity to invest, the increase in precautionary saving, the introduction of non-standard monetary policies or the increase in income inequality. Looking forward, this chapter argues that the normalisation of monetary policies, the change in the growth model of certain emerging countries and the socio-demographic and productivity trends would point to a gradual recovery in real interest rates over a medium-term horizon, albeit with a high degree of uncertainty. Over the longer term, this trend may tail off against a background of limited technological progress or a sharper-than-expected decline in investment in the emerging economies.