Why Are Interest Rates So Low?

John, Tatom (2006): Why Are Interest Rates So Low? Published in: Research Buzz , Vol. 2, No. 4 (30 April 2006): pp. 1-5.

Abstract

Interest rates have been unusually low in this decade. Some prominent analysts have suggested that this is due to a saving glut, especially in China. A more likely source of the lower real interest rate level is a fall in the demand for capital goods and its financing. This article looks at whether capital spending and its financing have been weak, possibly accounting for declining real interest rates. It shows that private investment has been weak by historical standards; and this has probably reflected low rates of return to global investment, as well as significant changes in the prices of capital goods relative to other goods and services. The implications of these developments are very different and also different from the excess saving hypothesis.

• Item Type: MPRA Paper
• Language: English
• Keywords: interest rates, saving, capital formation
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

Bernanke, Ben, “The Global Saving Glut and the US Current Account Deficit,” Sandridge Lecture, Virginia Association of Economists, Richmond, Va,, March 10, 2005, and Homer Jones Lecture, St. Louis, April 14, 2005.

Greenspan, Alan, “Testimony,” Monetary Policy Report to Congress, Board of Governors of the Federal Reserve System, Feb.16, 2005.

Summers, Lawrence H., “Reflections on Global Impbalances and Emerging Markets Reserve Accumulation,” L.K. Jha Memorial Lecture, Reserve Bank of India, March 24, 2006. www.president.harvard.edu/speeches

Tatom, John A., “Are We Saving?” Financial Focus, Spring 2006, pp. 35-37.