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Past Interest Rates and Future Growth

In studying the roots of macroeconomic trends across the advanced economies in recent decades, it is tempting to conclude that a declining rate of output growth is the inevitable result of deeper historical forces and intractable structural factors. But secular stagnation is well within our power to reverse.

NEW YORK – A new chapter has been written in the history of risk-free global interest rates. In a recent study, Paul Schmelzing of the Bank of England tracks global real (inflation-adjusted) interest rates over the period from 1311 to 2018. Despite temporary stabilizations during the periods 1550-1640, 1820-1850, and 1950-1980, he finds that global safe real rates have persistently trended downward over the past five centuries, and that negative safe real rates have steadily become more frequent since the fourteenth century.

In light of this historical record, Schmelzing questions the hypothesis, advanced by Lawrence H. Summers of Harvard University and others, that advanced economies are experiencing “secular stagnation.” Insofar as the secular-stagnation narrative “posits an aberration of longer-term dynamics over recent decades,” Schmelzing believes that it is “fully misleading.”

Some caution concerning Schmelzing’s empirical findings is warranted, however. The supposedly safe rates he catalogs may in fact include default risk premia that could vary systematically over time. The early inflation data are likely to be unreliable. And even if Schmelzing’s data provide an unbiased and reliable picture of real interest-rate developments since the fourteenth century, they have no obvious bearing on the plausibility of the secular-stagnation hypothesis for 2020 and beyond.

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