Title: The Neutral Rate of Interest - Dallasfed.org
Headings: The Neutral Rate of Interest
The Neutral Rate of Interest
What Is the Neutral Rate?
Why Is the Neutral Rate Important?
A Reality Check: Historical Trends in Global Interest Rates
Neutral Rate Uncertainty and the Challenge of Forecasting Productivity Growth
Implications for Monetary Policy
Conclusion
APPENDIX
Modeling the Neutral Rate (r*)
Notes
About the Author

Content: One driver of the decline in nominal yields since the 1970s is likely a significant reduction in longer-run inflation expectations. Changes in inflation-adjusted global government bond yields should, over time, reflect changes in the longer-run neutral real rate of interest. After adjusting for inflation, the real interest rates on safe and liquid assets—primarily global government bonds of various countries—have declined significantly over the past 30 years, a decline that precedes the Great Recession. Our economists at the Dallas Fed believe that this decline in real interest rates is likely due to lower rates of trend economic growth in these various countries, at least partly as a result of demographic shifts (particularly aging populations) and lower rates of trend productivity growth. [ 1]
Another major factor in the downward trend in bond yields is the substantial growth in worldwide demand for safe and liquid assets arising from a considerable increase in the size of pension funds, global central bank balance sheets, and other fixed-income investment pools. When global investors look for safety and liquidity, they naturally gravitate to U.S. Treasury bonds as well as other sovereign obligations. As financial markets have become much more globally integrated, the search for safe assets has increasingly become global. In this search, much has been made of the shortage of safe assets in which these global pools of money can be invested. The impact has been to drive down interest rates on government debt in the U.S. as well as globally. Dallas Fed economist Marc Giannoni and his research co-authors have argued that the increased demand for safety and liquidity explains a decl