Globalization and Its Growing Impact on the Natural Rates of Interest in Developed Economies

This paper quantitatively examines the effect of globalization on the natural rate of interest in developed economies, including Japan, the US, and the euro area. By incorporating into the model the variables that capture global economic and financial trends, such as demand and supply of safe assets and cross-border spillovers, with a smooth-transition framework, we account for the existence of non-linear regime change of their coefficients, driven by globalization. Our findings indicate that along with the progress of globalization, (i) the impact of global factors rapidly increased around 2000, and (ii) the commonly observed decline in the natural rate of interest can be largely attributed to these global factors. These findings underscore the importance of incorporating global factors such as demand and supply of safe assets and global spillovers, with their increasing impact, alongside the domestic factors such as productivity and demographics, when investigating developments in the natural rate of interest.