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Saturday, July 25, 2015

Survey of Long-Term Interest Rates

The conclusion of a long White House report on long-term interest rates:

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V. Conclusion Many factors play roles in the determination of long - term interest rates, including the rate of productivity growth, beliefs about future risks, consumer preferences , demographic shifts , and the stance s of monetary and fiscal policy. As markets have become globally integrated, conditions in foreign markets are increasingly important for U . S . long - term interest rates. Over the past two decades, long - term interest rates have been falling worldwide. An explanation for why they are so low — and whether those low levels will persist — i s one of the most difficult questions facing macroeconomists today.
 Interest rates are jointly determined by the supply of saving and the demand for investment. While it is difficult to make strong predictions, this report argues that there are a number of reasons to think that the global saving supply curve has shifted outward , a development that would help to keep equilibrium interest rates low . As with any price in the economy, a low price is beneficial to some and has negative ramifications for others. Low long - term interest rates make it cheaper for governments to finance their debt burdens. By reducing the cost of borrowing, lower long - term interest rates create more fiscal sp ace for government programs, including infrastructure investment, reducing the cost of expansionary fiscal policy. Lower long - term interest rates should also reduce the cost of borrowing by the private sector, encouraging investments that can enhance growth in the future. However, if rates are low because of subdued expectations about future growth, investment is unlikely to be robust .
For savers, lower equilibrium long - term interest rates would affect the return to savings, the cost of borrowing for homeownership, and lifecycle decisions about when to retire and the time pattern of consumption.
Finally, lower long - term interest rates could have important implications for monetary policy, particularly regarding the zero lower bound for short - term interest rates and specific policy tools. Market participants , in turn, may take these factors into effect when making economic forecasts or planning consumption and investment.
Ultimately, interest rates reflect fundamental macroeconomic conditions and there is no “optimal” rate of interest. The goal of policy should not be to target a particular rate, but to support long - run growth, maintain price stability, and strengthen the resilience of financial markets .

    Posted by on Saturday, July 25, 2015 at 10:58 AM in Economics | Permalink  Comments (35)


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