Working Paper: NBER ID: w22618
Authors: Pierre-Olivier Gourinchas; Hélène Rey
Abstract: 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 tradeoff 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.
Keywords: real interest rates; safe assets; global imbalances; zero lower bound
JEL Codes: E2; E4; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| World consumption-wealth ratio (F62) | Real interest rates (E43) |
| Deleveraging and safe asset scarcity (E44) | Real interest rates (E43) |
| External exposure (O36) | Domestic economic performance (P17) |