In its just-published World Economic Outlook the IMF trumpets the view that the real level of
equilibrium interest rates worldwide has declined substantially since the 1980s
and is now in slightly negative territory. There is a good Irish word to
describe this story: baloney.
The IMF authors (“Perspectives on Global Real Interest Rates,”
April 2014) cite three factors accounting for their hypothesized decline in
rates: substantially higher savings in the emerging market economies, an
increased riskiness of equity relative to bonds coupled with an increased
demand for safe assets, and finally, a persistent decline in investment rates
in advanced economies especially since the recent global financial crisis. They
are oblivious to two huge potential errors in their analysis.
First, they equate observed interest
rates in the market place — albeit averaged over a period of many years — to
the neutral level of interest rates. The latter is an equilibrium concept which
does not reveal itself directly or instantaneously in the market-place. In a
stable monetary environment the invisible hands would tend to steer market
rates toward neutral (itself shifting through time). But these hands do not
work well under conditions of monetary instability......To Read More....
No comments:
Post a Comment