The fall in real long‑term government bond yields

This paper contributes to the empirical literature investigating reasons for the fall in real interest rates in advanced economies. It focuses on selected drivers from three broad categories: demographic changes; imbalances between supply of and demand for safe assets; and monetary policy at home and abroad. Several country-specific error-correction models are estimated for the G7 countries, starting in the early 1970s. Results support the expected relationship with demographic variables. However, this is not corroborated by models with household saving, raising questions about transmission mechanisms of demography. For most countries, there is little robust evidence about the role of proxies of the supply of and demand for government bonds. However, real long-term government bond yields are closely linked with real policy interest rates, with little evidence that real policy interest rates followed secular declines in real potential GDP growth – a proxy of a neutral interest rate. Domestic real yields are also affected by foreign real rates, indicating the role of spillovers and common global trends.