Low interest rates may be the new normal

Subject

Modelling lower rates for longer.

Significance

The ‘secular stagnation' thesis argues that as population growth slows, the need of businesses to invest in plant and equipment slows and the supply of funds from households grows as they save more, putting downward pressure on interest rates. New research attempts to quantify this hypothesis and to show what it would take to go back to 'normal'.

Impacts

• 'Forward guidance' will be of little use if there is a recession as there would be no reason to expect an increase in policy rates.
• Asset bubbles would likely be a feature of any sustained non-fiscal effort to engineer a deeply negative real interest rate.
• The US trade deficit, usually a welcome source of lower rates, will in this context exacerbate the zero-lower-bound issue in a recession.