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Long-Run Trends in Long-Maturity Real Rates, 1311-2022

Journal: American Economic Review

Date: 20240801

Author: Rogoff, Kenneth S.; Rossi, Barbara; Schmelzing, Paul

Abstract:
Taking advantage of key recent advances in long-run economic and financial data, we analyze the statistical properties of global long-maturity real interest rates over the past seven centuries. In contrast to existing consensus, we find that real interest rates are in fact trend stationary and exhibit a persistent downward trend since the Renaissance. We investigate structural breaks in real interest rates over time and find that overall the Black Death and the 1557 "Trinity default" appear as consistent inflection points. We further show that demographic and productivity factors do not represent convincing drivers of real interest rates over long spans.

Link: Google Scholar

Key Findings

Stationarity of Real Interest Rates

Long-run real interest rates exhibit trend stationarity across multiple countries over 700+ years, contradicting previous research findings of unit roots in shorter time periods.

Structural Breaks

Key structural breaks identified in 1349 (Black Death), 1557 (sovereign defaults), and 1981 (monetary policy shift), with varying significance across global and country-level series.

Half-Life Analysis

Real rates show faster mean reversion in longer samples, with half-lives of 2-4 years in full samples versus 4-7 years in post-1914 periods.

ADF-GLS Test Results Across Countries

  • All countries show test statistics exceeding critical values, confirming stationarity
  • Strongest evidence for Dutch (-8.2102) and Germany (-9.8656)
  • Even Japan and US with shorter samples show stationarity at 5% level

Variance Ratios Over Time Horizons

  • Variance ratios decline significantly between 2-14 year horizons
  • Global GW series shows consistent decline from 1.0666 at 2 years to 0.0849 at 50 years
  • Pattern confirms mean reversion in real rates

Half-Life Estimates Across Time Periods

  • Shorter full-sample half-lives (1.68-2.52 years) for older series
  • Consistent increase in half-lives in post-1914 period (5.77-6.97 years)
  • Demonstrates changing persistence patterns over time

Contribution and Implications

  • Challenges conventional wisdom about non-stationarity of real interest rates by using multi-century data
  • Identifies historically significant structural breaks beyond recent periods typically studied
  • Demonstrates importance of long-term data in understanding interest rate dynamics

Data Sources

  • ADF-GLS test statistics visualization based on Table A.13
  • Variance ratios chart constructed using data from Table A.10
  • Half-life estimates visualization derived from Table A.12