Global Interest Rate Environment with Emphasis on Quantitative Easing Implications

Constructing global real interest rates at short and long maturities and reviews their evolution since 1980. It also traces the evolution of the cost of capital, It then analyzed key factors that could explained the observed pattern, shift in savings, changes in monetary and fiscal policy, shift in investment demand, changes in relative prices of investment, monetary policy and portfolio shifts between bonds and equity. It closes by considering how the main factors behind the decline in real interest rates might play out in the medium term. Real interest rates and the cost of capital are likely to rise moderately in the medium term from current level. Part of the reason is cyclical, the extremely low real interest rates of recent years reflects large negative output gaps in advanced economies. Indeed, the real interest rates might have declined even further in the absence of the zero lower bound on nominal interest rate.