Working Paper: CEPR ID: DP16941
Authors: Pierre-Olivier Gourinchas; Hélène Rey; Maxime Sauzet
Abstract: The current environment is characterized by low real rates and by policy rates close to or at their effective lower bound in all major financial areas. We analyze these unusual economic conditions from a secular perspective using data on aggregate consumption, wealth and asset returns. Ourpresent-value approach decomposes fluctuations in the global consumption-to-wealth ratio over long periods of time and show that this ratio anticipates future movements of the global real risk-free rate. Our analysis identifies two historical episodes where the consumption-to-wealth ratio declined rapidly below its historical average: in the roaring 1920s and again in the exuberant 2000s. Each episode was followed by a severe global financial crisis and depressed real rates for an extended period of time. Our empirical estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumption-to-wealth ratio decline (E21) | Global real risk-free rate decrease (E43) |
| Consumption-to-wealth ratio decline (E21) | Financial crises (G01) |
| Financial crises (G01) | Global real risk-free rate decrease (E43) |