What Happens To Interest Rates During A Recession – After the global financial crisis, the inflation-indexed decade in Treasury bond rates – a forward measure of long-term real interest rates – fell dramatically to close at an average of just over 2% in the years 2003-7. Zero percent average from 2012 to 2021. From peak to trough, the decline was more than 3.5%. Low real rates fueled a massive global run-up in stock and housing prices; They also had a greater impact on the debate on fiscal responsibility and government debt (e.g. Holston et al. 2017, Blanchard 2019), as well as on fiscal policy; Ultra-low real interest rates played a key role in the Federal Reserve’s 2021 plan to dramatically change its monetary policy.

There is now a large academic literature suggesting why, given long-term secular trends in population, productivity and inequality, ultra-low rates should be expected to persist. Persistently low real rates play a central role in the dominant theory of secular stagnation (Rachel and Summers 2019).

What Happens To Interest Rates During A Recession

From the large empirical literature on the time series of the action of real rates, the idea that low rates will remain indefinitely does not seem unreasonable; And current research almost universally rejects the existence of a unit root (e.g., Nelson and Plosser 1982, Rose 1988, Hamilton et al. 2016).

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In our recent paper (Rogoff et al. 2022) we challenge this view. We consider the debate as to whether real interest should be subject to large shocks, along with increases in prices, growth and mobility data, along with reconstructing the historical dynamics of real interest rates (Schmelzing 2020, 2022). Rates are expected to disappear in time. A new element of our approach is to look at a very long time (700 years), and use long-term maturity care rather than short-term care.

While previous research focuses mainly on post-WWII data (although some papers go back 150 years), our paper looks at 700 years of annual data for eight countries: Italy, Spain, the Netherlands, Britain , France, Japan, Germany, USA, including manufacturing at the global real rate (or GDP weighted or balanced by countries). Part of the reason we focus on long-term rates is that long-term interest rate data have much higher returns than short-term rate data; Widespread and sustained issuance of short-term consolidated debt begins only in the late 19th century. The long-term interest rate is probably much more important to the economy. In our main analysis, we expected a model with seven-year growth, which mimics the average growth of the past (following the classic work of Homer and Silla 2005), but our results are robust to different instruments. ​are (eg Eichengreen et al. 2021); A model including time series to estimate the formation of inflation expectations (as in Hamilton et al. 2016).

Our median premise is that for a series of eight individual countries, as well as for the global mean average, real interest rates are constant; We consistently reject the presence of a unit root at high levels of significance across a wide range of extended characteristics. Importantly, the real interest rate has had a modest but consistent downward trend of 1.6 basis points per year since the fourteenth century: a trend that does not exclude temporary deviations—including the 350 basis point declines seen in some of the global financial crises. After years came Figure 1 gives an exploded version of our main global series with a Baxter-King bandpass filter, modulated to produce long-term fluctuations.

Source: Rogoff et al. (2022). This figure compares the slow-lag global real time series (raw data) with the filtered long-term trend of King Backstrand (1999) of the same series, extracting fluctuations with cycles of length greater than 100 years (red line). line, blue line) shows. .

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As for the speed of return to bending, we find half-life estimates in various countries ranging from one to six years; Half-life waits for 50% of the crime to disappear. It is broad, but it does not cover decades.

We also test extensively for structural breaks in the mean and trend. This is significant because it has been reported that a major break occurred around 1981. There is also literature suggesting that the creation of the federal government in 1913, following the outbreak of WWI, led to change (e.g. Mankiw and Miron 1986). Looking longer, the only breaking points that appear strongly and consistently across nations and specialties are the Black Death (1349) and what we call the “Default Trinity” in 1557–8, France, Spain and the General Orders (the Netherlands ) with .) all lead to decades of defaulting and financial chaos. We find no evidence of a break in real dynamics around 1694 (where Douglas North and Barry Weingast argue that the Glorious Revolution led to significant changes in financial institutions). A break in 1981 is found in some series (including the USA) if we break the data to include only the last 150 years, but is not significant if we consider longer perspectives. There is strong evidence for a break in 1914, but much less than the literature suggests.

What is the great literature to show that weak population growth and the decline in real growth after the global crisis can be explained? Looking back at the statistics over the centuries provides an entirely different perspective. In fact, long-term trends in population and productivity growth are both negatively correlated with real interest, not positively correlated as much of the recent literature posits. Figure 2 illustrates this point of population growth; The positive correlation—quite evident in the last few decades—seems to be an anomaly in the longitudinal sample. We see this evidence as supporting our main hypothesis that post-global interest rate declines are likely to reflect cyclical rather than secular factors. Indeed, the fact that long-term trends in real interest rates and growth are negatively correlated is relevant to the debate about whether future increases in interest rates could undermine debt sustainability in a heavily indebted economy. ; A growth that is not fueled by high growth is very weak.

Source: Rogoff et al. (2022). Aggregate growth includes a similar sample of eight countries, with a series of country components according to the country’s total GDP output. Malnima (2011) sources for northern Italy; Pfister for Germany (2021); de la Escosura et al. (2022) in Spain (‘compromise estimate’); Dupaquier (1988) and Ridolfi (2019) in France; van Zanden and van Leeuwen (2012) for the Netherlands; Broadberry and Fouquet (2015) is for Britain. The red line shows the long-term trend of total population growth. The blue line shows the longer (filtered) trend of the global real rate.

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Our paper addresses the question of why there has been a persistent downward trend in real rates over the centuries; Declining principal risk and increasing liquidity are candidate factors, but we don’t accept the answer. Partial failure due to sudden inflation was especially prevalent in the last century and is happening again as these words are written. But our main result that long-term real interest rates are stable does not require us to take a position on the issue of why long-term real interest rates have fallen gradually over time.

The possibility cannot be ruled out that real short-term rates are not constant, even if long-term rates are constant. For example, it is possible that the premium and liquid value duration drive a gap between short and long rates. In fact, using our method and running similar regressions for small rates on the same (relatively) small samples that the current literature focuses on, we can also rule out non-stationarity.

The existence of a post-crisis global view of declining secular rates is deeply entrenched. The just-published October 2022 IMF World Economic Outlook notes that “real interest rates generally have not yet returned to pre-pandemic levels”. However, our study of long-run real rates presents a very different perspective that should at least be considered in the serious debate about the future path of real wages and what this means for fiscal and monetary policy. and asset classes. There have been long episodes of serious real value in the past, and in fact we know of four cases, but they all ended in the end. Of course, current ten- and 30-year Treasury yields have already risen dramatically in recent months and are now above 1.5%. A global recession could bring them back below zero, but our analysis suggests that in the medium term the reverse trend – the slight downward trend that has existed since the dawn of today’s financial markets – is common, but post-globalisation forms There has been a sharp decline in . Crises are periodic, not secular.

Hamilton JD, Hatzius J, Harris E, West KD (2016), “Equilibrium real rates: past, present and future.”

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Nelson, C

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