DP11503 Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound

Author(s): Pierre-Olivier Gourinchas, Hélène Rey
Publication Date: September 2016
Keyword(s): real interest rates, secular stagnation, Triffin dilemma
JEL(s): F3, F41
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11503

The current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment. First, we decompose the fluctuations in the world consumption wealth ratio over long period of times and show that they anticipate movements of the real rate of interest. Second, our estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time. In this context, we argue that there is a renewed Triffin dilemma where safe asset providers face a trade-off in terms of external exposure and real appreciation of their currency. This trade-off is particularly acute for smaller economies. This is the `curse of the regional safe asset provider.' We discuss how this `curse' is playing out for two prominent regional safe asset providers: core EMU and Switzerland.