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Thursday, April 03, 2014

The Downward Drift in Real Interest Rates

David Wessel reports on the IMF's World Economic Outlook:

The Downward Drift in Inflation-Adjusted Interest Rates: Why? And So What?, by David Wessel, WSJ:

Real-rates

...Two economists writing in the International Monetary Fund’s new World Economic Outlook note that inflation-adjusted interest rates have been coming down for more than three decades and suggests they may remain lower than normal for a very long time. ... But the important point is the trend towards lower interest rates began long before the Great Recession and advent of the Fed’s quantitative easing...
Why does this matter? ... It also would pose a big challenge for the Fed. For one thing, it boosts the risk that investors will do foolish things to get a little extra yield and provoke the much-dreaded “financial instability.”
It also increases the likelihood the economy will spend a whole lot more time with nominal rates ... uncomfortably close to zero, where it’s much harder for a central bank to use interest rates to steer the economy out of recessions.  ...
If so, that argues ... for worrying a lot less about government budget deficits and a lot more about using government spending to give the economy a lift that monetary policy cannot provide. ...

And at the same time, "Governments Scale Back Spending on School Construction, Public Safety."

    Posted by on Thursday, April 3, 2014 at 09:53 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (27)

          


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