In a (December 2015) Bank of England Staff Working Paper, Lukasz Rachel and Thomas Smith dissect the global decline in long-term real interest rates over the last thirty years.
A summary of their executive summary:
- Market measures of long-term risk-free real interest rates have declined by around 450bps.
- Absent signs of overheating this suggests that the global neutral rate fell.
- Expected trend growth as well as other factors affecting desired savings and investment determine the neutral rate.
- Global growth was fairly steady before the crisis but may (be expected to) fall after the financial crisis. Recently, slower labor supply (demographics) and productivity growth may account for a 100bps decline in the real rate.
- Desired savings rose, due to demographics (90bps), higher within country inequality (45bps), and higher savings rates in emerging markets following the Asian crisis (25bps).
- Desired investment fell, due to a lower relative price of capital goods (50bps) and less public investment (20bps).
- The spread between the return on capital and the risk-free rate rose (70bps).
- These trends look likely to persist and the “global neutral real rate may settle at or slightly below 1% over the medium- to long-run”.