Are we witnessing a reversal of previous patterns or will the world revert to the era of low interest rates as current shocks dissipate? To answer this, a new CEPR study by Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi develops a structural model to study the global trend real interest rate, "Global R*". The authors focus on five potential drivers: productivity growth, population growth, longevity, government debt, and the relative price of capital.
The study finds that the decline in 'Global R*', amounting to over 3 percentage points between the late 1970s and 2020, is primarily attributed to diminishing productivity growth and increased longevity. These findings suggest that, unless substantial reversals in productivity growth or longevity trends occur, or new drivers emerge to counterbalance these shifts, 'Global R*' is poised to remain at historically low levels, significantly influencing global interest rate dynamics in the foreseeable future.