Low real rates as driver of secular stagnation: empirical assessment

We empirically test whether there is a causal link between the real interest rate and the natural rate of interest, which could be a harbinger of secular stagnation if the real rate declines. Outcomes of VAR models for Japan, Germany and the US show that a fall in the real rate indeed affects the natural rate. This causality is significant for Japan, borderline significant for Germany and not significant for the US. The outcomes for Japan confirm that a prolonged period of low real rates can affect potential economic growth. The policy implication is that implementing measures that raise the natural rate will be more effective in avoiding secular stagnation than reducing the real rate through higher inflation expectations.
 
Keywords: interest rates, financial markets and the macroeconomy, monetary policy.
JEL classifications: E43, E44, E52.

Working paper no. 444