Low long-term interest rates as a global phenomenon

International linkages between interest rates in different currencies are strong, and ultra-low rates have become a global phenomenon. This paper compares how interest rates in advanced economies and in emerging economies are conditioned by two global benchmarks - the Federal funds rate at the short end and the "world" real interest rate at the long end. Real equilibrium policy rates (the natural rate) have fallen in many countries, and short-term rates worldwide have been further depressed by many years of the US policy rate close to zero. Nevertheless, changes in the Federal funds rate have less effect on longer-term rates, and thus on financing conditions, than is often supposed. The decline in the world long-term rate since 2008 has been driven almost entirely by a fall in the world term premium (negative in nominal terms since mid-2014). The world short-term rate expected over the long run has fallen only modestly over the past seven years or so, and is now just over 2% (compared with around 4% pre-Lehman).

JEL classification: E43, E52, F41, F65, G15

Keywords: bond markets, financial globalization, natural rate of interest, term premium and shadow policy rate