We argue that strong globalization forces have been an important determinant of global real interest rates over the last five decades, as they have been key drivers of changes in the natural real interest rate-i.e. the interest rate consistent with output at its potential and constant inflation. An important implication of our analysis is that increased competition in goods and labor market since the 1970s can help explain both the large increase in real interest rates up to the mid-1980s and-as globalization forces mature and may even go into reverse, leading to incrementally rising market power-its subsequent and protracted decline accompanied by lower inflation. The analysis has important implications for monetary policy and the optimal pace of normalization.

• Cover
• Contents
• ABSTRACT
• I. INTRODUCTION
• II. GLOBALIZATION AND THE NATURAL INTEREST RATE
  • A. A Simple Neo-classical Model of the World Economy
  • B. Deriving the World Natural Real Interest Rate
• III. EFFECTS OF GLOBALIZATION ON THE NATURAL INTEREST RATE
  • A. Non-linear Implications of Global Integration
  • B. How Large is the “Globalization Premium”?
• IV. EMPIRICAL EVIDENCE
  • A. The Specification
  • B. Data Regression Results
• V. INSIGHTS FROM A LARGE MODEL OF THE GLOBAL ECONOMY
  • A. GIMF in a Nutshell
  • B. Calibration
  • C. Simulation’s Results
• VI. SUMMARY AND CONCLUSION
• TABLES
  • 1. OLS Estimates of Fundamental Drivers of Real Interest Rates, 1985–2016
• APPENDIX
  • Figures
• REFERENCES