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Is the long-term interest rate a policy victim, a policy variable or a policy lodestar?

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  • Philip Turner

Abstract

Few financial variables are more fundamental than the "risk free" real long-term interest rate because it prices the terms of exchange over time. During the past 15 years, it has dropped from a range of 4 to 5% to a range of 0 to 2%. By late 2011, cyclical factors had driven it close to zero. This paper explores why. Possible persistent factors are: the investment of the large savings generated by developing Asia in highly-rated bonds; accounting and valuation rules for institutional investment; and financial sector regulation. The consequences could be far-reaching: cheaper leverage; less pressure to correct fiscal deficits; larger interest rate exposures in the financial industry; and a more cyclical bond market. During the financial crisis, central banks in the advanced countries have made the long-term interest rate a policy variable as Keynes had always advocated. This policy focus will draw more attention to the macroeconomic and financial consequences of government debt management policies. Coordination between central bank balance sheet policies and government debt management is essential. With government debt very high for years to come, bond market volatility could confront central banks with unenviable choices.

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  • Philip Turner, 2011. "Is the long-term interest rate a policy victim, a policy variable or a policy lodestar?," BIS Working Papers 367, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:367
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    References listed on IDEAS

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    Cited by:

    1. J. Boeckx & N. Cordemans & M. Dossche, 2013. "Causes and implications of the low level of the risk-free interest rate," Economic Review, National Bank of Belgium, issue ii, pages 63-88, September.
    2. Andrew Filardo & James Yetman, 2012. "Key facts on central bank balance sheets in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 10-29, Bank for International Settlements.
    3. Jagjit S Chadha & Philip Turner & Fabrizio Zampolli, 2013. "The interest rate effects of government debt maturity," BIS Working Papers 415, Bank for International Settlements.
    4. Eva Zamrazilová, 2014. "Měnová politika: krátkodobá stabilizace versus dlouhodobá rizika [Monetary Policy: Short-Term Stabilization versus Long-Term Risks]," Politická ekonomie, Prague University of Economics and Business, vol. 2014(1), pages 3-31.
    5. Jagjit S. Chadha, 2012. "World Real Interest Rates: A Tale of Two Regimes," Studies in Economics 1205, School of Economics, University of Kent.
    6. Weale, Martin & Wieladek, Tomasz, 2016. "What are the macroeconomic effects of asset purchases?," Journal of Monetary Economics, Elsevier, vol. 79(C), pages 81-93.
    7. Gabriel A. Giménez Roche, 2016. "Entrepreneurial ignition of the business cycle: The corporate finance of malinvestment," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 29(3), pages 253-276, September.
    8. Sebastián Claro & Carola Moreno, 2015. "Long-term rates and the term premium: evidence from Chile," BIS Papers chapters, in: Bank for International Settlements (ed.), What do new forms of finance mean for EM central banks?, volume 83, pages 97-112, Bank for International Settlements.
    9. Ronny Mazzocchi, 2013. "Investment-Saving Imbalances with Endogenous Capital Stock," DEM Discussion Papers 2013/14, Department of Economics and Management.
    10. Dong He & Robert N McCauley, 2013. "Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit," Working Papers 152013, Hong Kong Institute for Monetary Research.
    11. Srichander Ramaswamy, 2012. "The sustainability of pension schemes," BIS Working Papers 368, Bank for International Settlements.

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    Keywords

    Long-term interest rate; bond market; government debt management; financial regulation; central banks;
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