A crucial debate: What will the level of long-term interest rates be in five or ten years?

Financial markets do not believe long-term interest rates will rise sharply in the United States or the euro zone in the next five or ten years. They have therefore chosen the camp of those who believe in the presence of structural factors that keep long-term interest rates low. There are actually two camps: Those who believe that the low level of long-term interest rates is mainly the result of expansionary monetary policies; when monetary policies normalise, according to this view, long-term interest rates will therefore rise sharply. This means that once the COVID crisis is over, restrictive fiscal policies will have to be conducted to reduce public debt ratios; this could even justify questioning the risk of public debt restructuring; Those who believe that the low level of long-term interest rates is the result of a lasting structural cause, i.e. the ( ex ante ) excess global savings and the resulting excess demand for risk-free bonds. If this view is correct, there is no reason to curb public spending and the increase in public debt. The problem is that we do not know which view is the right one. Our econometric analysis suggests that all explanations (monetary policy, expected inflation, global savings rate) are very significant, but that the global savings rate explains only a small fraction of the fall in long-term interest rates. If governments are cautious, they will then prevent a rise in long-term interest rates by returning to a less expansionary fiscal policy, but it is a pity if long-term interest rates in reality remain very low, which nevertheless does not seem consistent with econometric analysis.