How will demographics, inequality, and the global financial system influence r* going forward? Similarly, automation makes low-income workers vulnerable to displacement – potentially also increasing inequality - while highly scalable technology can lead to a concentration of technological behemoths, boosting corporate savings piles. Since high-income households tend to save a larger share of their income, inequality tends to increase aggregate savings, bearing down on r*. Other potential drivers, such as inequality and technology, operate along similar lines. This means the net impact of demographics on r* will reflect the balance of these effects. In an ageing society, fewer workers, on the one hand, reduce the number of savers and put upward pressure on interest rates, but on the other hand, also push down on potential economic growth. Stronger potential growth raises the rate of return on investments, spurring demand for funds to invest in physical assets, while expectations of stronger future income growth can support household consumption by reducing the need to save.ĭemographics can drive r* via two channels that may push in opposite directions and illustrates why it is necessary to consider the net balance of the forces operating on interest rates. Growth and the other factors that influence the interplay of savings and investment balances – such as demographics, technology, inequality, and government fiscal policy – determine r* over the long-term and therefore the level of policy rates and yields. Both are influenced by a wide range of factors operating over differing time horizons. It is closely related to economic growth and is also the interest rate that balances an economy’s supply of savings with the demand for investment. The equilibrium interest rate is a nebulous theoretical concept. Where policy rates will settle is a matter of fierce debate and in the medium- to long-term will be determined by the forces operating on real equilibrium interest rates (r*). Lower rates raise the discounted value of firms’ revenues, boosting stock prices, for example. Interest rates are the price of money, and, as such, they influence not just the cost of debt, but also the full spectrum of asset prices. We show why those expecting demographic shifts or greenflation to keep interest rates high will likely be proved wrong and how growth prospects often matter more in determining where they will eventually settle than ageing populations, investment trends, or inequality. To answer this question, we explore key influences on long-term interest rates for 29 major economies accounting for almost 90% of the world economy, ranging from demographics through to inequality and the global financial system.
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