The global saving glut and the fall in U.S. real interest rates: A 15-year retrospective

Abstract

Over the period 1992–2019, the real yield on ten-year U.S. Treasury securities fell by about 350 basis points. Roughly half of that drop happened before the Great Recession, which started in 2008, and the rest occurred during the downturn and its aftermath. Eggertsson, Mehrotra, and Summers (2016) show that the drop in long-term real interest rates in the other Group of Seven (G7) countries1 mirrors closely the U.S. experience, and Yi and Zhang (2017) note that, despite some variation across countries, the fall in these real interest rates is to a substantial extent a worldwide phenomenon. The question of why long-term interest rates have declined to such an extent received particular interest in the U.S. context for two reasons. First, falling long-term real interest rates were considered a major source of the housing boom that eventually gave way to the global financial crisis of 2007–08. Second, long-term rates stubbornly continued to fall during the expansion following the 2001 recession despite a sequence of increases in the federal funds rate and associated short-term market rates—a phenomenon that became known as the “Greenspan conundrum.”2