CAMBRIDGE – A day seldom passes without articles appearing in the financial press pondering why interest rates have remained so low for so long. This is one of those articles. So let’s start by clarifying whose and which interest rates are low and what is and isn’t novel or unprecedented.
Interest rates in emerging and developing countries are importantly affected by what happens in the world’s largest economies, and the ongoing multi-year low-interest-rate cycle has its roots in the United States, Europe, and Japan. Low rates are predominantly the advanced economies’ “new normal.”
Interest rates (short and long maturities) had been trending lower in most of the advanced economies (to varying degrees) since the 1980s, as inflation also fell sharply. In the years prior to the 2008-2009 financial crisis, former US Federal Reserve Chairman Ben Bernanke repeatedly stressed the role of a global “saving glut” (notably in China) to explain lower rates.
More recently, former US Treasury Secretary Lawrence Summers argued that “secular stagnation,” manifested in sustained lower investment and growth in many advanced economies, has been a major force driving down rates. These hypotheses (which are not mutually exclusive) are especially helpful in understanding both why rates were drifting lower prior to the crisis and why the downturn has persisted.