Report
Patrick Artus

Can monetary policy keep real interest rates abnormally low in the long term?

This is an extremely important question. The highly expansionary monetary policy in OECD countries has now led to abnormally low real long-term interest rates. In principle, however, real long-term interest rates revert to normal in the long term: they are no longer determined in the long term by monetary policy, but by structural features of the economy: capital productivity, potential growth, etc. If central banks cannot keep real interest rates abnormally low in the long term, then the long-term equilibrium in OECD countries will be very different from that observed today: If central banks keep nominal interest rates very low, then inflation will also be very low in the long term (this is the neo-Fisherian dynamics); If the real interest rate returns in the long term to the vicinity of the real growth rate, the mechanism that is currently keeping debt ratios in check (the fact the real interest rate is lower than real growth) will disappear, and there would be grounds to fear a rise in debt ratios if other economic policies are unchanged
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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