VOX CEPR Policy Portal Create account | Login | Subscribe

Research-based policy analysis and commentary from leading economists Search

Columns Covid-19 Vox Multimedia Publications Blogs&Reviews People Debates Events About

By Topic By Date By Reads By Tag

The ‘suprasecular’ stagnation

Paul Schmelzing 24 May 2018

Growth rates have been stubbornly low since the financial crisis, and many have noted that the interest
rate environment has been weakening since the 1980s. This column places recent episodes in the context
of longer-term economic history, going back to the 14th century. Trends over recent decades are generally
in line with a long-term ‘suprasecular’ trend of declining real rates. Negative real rates could become a
more frequent phenomenon, and indeed constitute a ‘new normal’. Paul Schmelzing
PhD candidate, Harvard

202 A A University

Don't Miss
Related What do recoveries from
Though US wage inflation and global growth are past US recessions teach
increasingly showing signs of life, proponents of the Secular stagnation versus technological us about the recovery from
the pandemic recession?
‘secular stagnation’ hypothesis remain sceptical – “it is shock scenarios
Antonin Bergeaud, Gilbert Cette, Rémy Lecat Hall, Kudlyak
more likely that a combination of rising inequality, slow
labour force and productivity growth, and greater Growing, shrinking, and long-run economic The bank business model
performance in the post-Covid-19 world
competition from developing countries will keep Stephen Broadberry, John Wallis Carletti, Claessens, Fatás,
private sector demand subdued”. Policy studies have
Cookie Control
Spanish economic growth in the long run Vives
supported This
this site
assessment
uses cookies –
to “the
store global equilibrium Leandro de la Escosura
real rate may settle on
information at your
or slightly
computer.below 1% over the Covid-19: China's
A new Vox Debate on Secular Stagnation Recovery
medium to long term” (Rachel and Smith 2017). Coen Teulings
About this tool Huang
From a post-war perspective,
read more the interest rate Mismeasuring long-run growth
Leandro de la Escosura
environment since the 1980s has no doubt been Events
weakening. The purpose of this column is not to come
Defending the Global
down squarely on one of the alleged drivers – be it a debt overhang, sluggish investment demand, Commons in a Covid-19
demographics, or an innovation dearth. A common characteristic shared by all these analyses World
remains the rather narrow historical frame of reference, typically relying solely on 20th century data, 2 - 2 July 2020 / Zoom
webinar / CEPR and LSE /
though notable exceptions for the 19th century exist in Hamilton et al. (2016) and Eichengreen IGA / SPP
(2015).
In Institutions We Trust?
The Economics of
Rather, it represents a call to take long-term economic history into account. I have previously made Institutional Change
the case that falling global real rates are nothing new in a multi-century context (Schmelzing 2017). 2 - 2 July 2020 / Zoom
In fact, real rates have been falling for over 500 years on a variety of regression measures. webinar / Georgetown
University Global Economic
Challenges (GEC) Network,
One can approach the case with single country data, splicing rates for sovereign long-term bond Université Libre de Bruxelles
issuers offering the most robust commitment mechanism in their respective age. The fact that this (Solvay), the Joint Research
Center of the European
series (Schmelzing 2018) does not feature a single principal default event over time warrants its Commission and the Center
characterisation as the ‘risk-free’ rate (Figure 1). On this measure, ex post real rates averaged over for Economic Policy
9% in the 15th century, before declining to just over 6% in the following century, until they reach Research (CEPR)
1.87% in the 20th century, and averaging 1.36% since 2000. COVID-19 in Developing
Economies: What
Figure 1 Real ‘risk-free’ rates since 1311, single-issuer basis consequences can we
anticipate and what effects
can we mitigate?
3 - 3 July 2020 / Zoom
webinar /
International Research
 Conference "Monetary
Policy, (Macro-)Prudential
Regulation and Their
Interactions"
7 - 8 July 2020 / Saint
Petersburg, Russia / Bank of
Russia
CEPR Household Finance
Seminar Series -
Modigliani Meets Minsky:
Inequality, Debt, and
Financial Fragility in
America, 1950-2016
10 - 10 July 2020 / Online /

CEPR Policy Research

Discussion Papers Insights

Homeownership of
immigrants in France:
selection effects related to
international migration
Here, I underscore these observations by following an alternative approach, displaying annual
flows
global GDP-weighted real rate data for all advanced economy issuers for which long-term debt Gobillon, Solignac
quotes can be obtained (see Figure 5). GDP data is partly provided by the well-known Maddison
Climate Change and Long-
(2007) series, while bond and inflation data come from a range of historical accounts, including Run Discount Rates:
Allen’s (2001) price series. The latter’s silver basis, which I also GDP weigh, provides a check for Evidence from Real Estate
debasement operations. Giglio, Maggiori, Stroebel,
Weber
Figure 2 Global nominal rate, GDP-weighted, 1314-2018 The Permanent Effects of
Fiscal Consolidations
Summers, Fatás
Demographics and the
Secular Stagnation
Hypothesis in Europe
Favero, Galasso
QE and the Bank Lending
Channel in the United
Kingdom
Butt, Churm, McMahon,
Morotz, Schanz

Subscribe

@VoxEU

RSS Feeds

Weekly Digest

We can see from Figure 2 that double-digit nominal rates were the norm in the financial system for
more than 150 years during the late middle ages, when the first secondary markets for government
obligations are documented. The years of the epic ‘Bullion famine’ in the 15th century – with
contemporary accounts across Europe replete with lamentations about “the insufferable scarcity of
fractional money in the city and Kingdom, which may occasion great scandal and danger” (Hamilton
1936: 37) – combined high nominal rates with deflation, as trade deficits and the takeover of silver
mines by the Ottomans depleted bullion reserves, and saw all time peaks in real rates close to 20%.
When trade deficits with the Levant stabilised and mines were retaken by Western armies, money
growth sharply rebounded (Day 1978).
In modern history, notable spikes are associated with the turmoil of the Napoleonic Wars, the US
civil war, Great Depression-era instability, and finally the oil shocks that ended with Paul Volcker’s
‘war on inflation’.

Though more nuanced, particularly for the 19th century, the bottom line on this alternative basis
remains consistent – since the peak in 1379 at 18%, the global real rate trends downwards, on
average by 2.8 basis points per annum, to the current 0.75% level on US 10-year Treasuries. Real
rates since the oft-cited peak of the 1980s have declined by 13.2 basis points per annum – an
acceleration from the all-time speed, but by no means a unique episode for advanced economies.
During the absolutism of Louis XIV in the second half of the 17th century, European real rates fell on
average by 24 basis points; during the two decades following the Congress of Vienna, real rates fell
by 33 basis points per annum; during the ‘Long Depression’ of 1875-1900, global real rates fell by
an average of 14.4 basis points per annum.

We can equally vary the price series to test robustness – prior to Allen’s (2001) CPI series, the
Phelps Brown and Hopkins (1956) price index constituted a standard long-term basket, based on
South England living costs. As Figure 4 confirms, the indices move closely in tandem over 1314–
1815. We observe the same all-time peak in the late Quattrocento, followed by continuous real rate
decline.

While nominal rates in the aftermath of the 2008 recession have ‘overshot’ the trend levels implied
by the steady 700-year record, and are indeed now too low against that backdrop, the actual
secular outliers in 20th century interest rate history were the sharp rise at the height of the interwar
Great Depression, and the oil shock-induced rate surge prior to Paul Volcker’s stabilisation in the
early 1980s. Falling real interest rates, however, are themselves nothing novel. Meanwhile, the
frequency of very low long-term real rates is increasing over time – I count 158 (52) individual
annual instances when global real rates fell to negative levels on a GDP-weighted (single issuer)
basis, of which more than a quarter (40%) are recorded since the beginning of the 20th century.

In a second step, I display the standard deviation of the global real rate, here as a 30-year rolling
average (Figure 3). The results are equally striking – it can be shown that the most recent standard
deviation of real rates reached historical record lows over a 700-year horizon, averaging just 175
basis points since 1980. This compares to all-time levels of 669 basis points, and an average of 534
basis points since 1500. While the early volatility is unsurprising given frequent harvest failures and
demographic shocks such as the Black Death, the sharp drop in volatility since the end of Bretton
Woods in the long-term context appears to have initiated a singular rate volatility episode. In other
words, global real rates are not just trending lower – they are also consistently becoming ‘stickier’.

Figure 3 Standard deviation, global real rates, 30-year rolling average, 1329-2018
Figure 4 Real rates 1314-1815, Allen versus PBH price basis, single issuer

Figure 5 Advanced economy GDP weights used, 1310-2018

These results suggest that even if cyclical forces could now stabilise nominal Treasury rates beyond
3%, central bankers may find that before they have fully returned to normalised balance sheets,
‘suprasecular’ real rate trends will have caught up to them once more. Negative real rates could
become a more frequent phenomenon, and indeed constitute a ‘new normal’. Absent geopolitical or
natural disaster shocks – which in the past at least temporarily ‘broke’ the trend – unconventional
monetary tools may (under this scenario) mature into more permanent features of the international
financial system.

References

Allen, R C (2001), “The Great Divergence in European wages and prices from the Middle Ages to
the First World War”, Explorations in Economic History 38: 411–47.

Day, J (1978), “The Great Bullion Famine of the fifteenth century”, Past and Present 79(1): 3–54.

Eichengreen, B (2015), “Secular stagnation: The long view”, American Economic Review: Papers
and Proceedings 105(5): 66–70.

Hamilton, J, E S Harris, J Hatzius and K D West (2016), “The equilibrium real funds rate: Past,
present, and future”, IMF Economic Review 64(4): 660–707.

Hamilton, E J (1936), Money, Prices, and Wages in Valencia, Aragon, and Navarre, 1351-1500,
Cambridge.

Homer, S and R Sylla (2005), A History of Interest Rates, New York, 4th edition.

King, M and D Low (2014), “Measuring the ‘world’ real interest rate”, NBER Working paper 19887.

Phelps Brown, E H and S V Hopkins (1956), “Seven centuries of the prices of consumables,
compared with builders’ wage-rates”, Economica (New Series) 23(92): 296–314.

Rachel, L and T Smith (2017), “Are low real interest rates here to stay?”, International Journal of
Central Banking: 1–42.

Schmelzing, P (2017), “Global real interest rates since 1311: Renaissance roots and rapid
reversals”, Bank Underground, 6 November.

Schmelzing, P (2018), “Eight centuries of the risk-free rate: Bond market reversals from the
Venetians to the VAR-shock”, Bank of England, Working Paper 686 (March 2018 update).

Summers, L (2018), “The threat of secular stagnation has not gone away”, Financial Times, 6 May.

202 A A
Topics: Economic history Financial regulation and banking

Tags: secular stagnation, low interest rates, zero lower bound, growth

Related
Secular stagnation versus technological shock scenarios
Antonin Bergeaud, Gilbert Cette, Rémy Lecat
Growing, shrinking, and long-run economic performance
Stephen Broadberry, John Wallis
Spanish economic growth in the long run
Leandro de la Escosura
A new Vox Debate on Secular Stagnation
Coen Teulings
Mismeasuring long-run growth
Leandro de la Escosura

Printer-friendly version