Interest rate trends in a global context

• Published in: Economic modelling Vol. 101; p. 105532
• Main Authors: Stolyarov, Dmitriy, Tesar, Linda L.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.08.2021
• Subjects: Interest rate forecast; International economic indicators; Secular decline; Interest rate forecast; International economic indicators; Secular decline
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2021.105532

Long-term interest rates have been falling globally since the early 1980s and have reached historically low levels. Past forecasts largely missed this secular decline. This paper reviews methodologies for making long-term interest rate projections. We synthesize results from studies that use long historical series and cross-country data to estimate the trend and decompose it into components. We then construct a set of economic indicators that are potentially useful in interest rate forecasting. We add international forward-looking economic indicators as explanatory variables in a standard macro-finance forecasting model. We find that the model with international variables can outperform the other models by better tracking the falling trajectory of U.S. interest rates in the post-2008 period, a trend that is missed by domestic variables. •Past forecasts largely missed the secular decline in interest rates and tended to predict rate reversals.•We review some common methodologies for interest rate forecasting.•We select macroeconomic variables relevant for interest rate forecasting based on economic theory.•Adding global macroeconomic indicators to a forecasting model allows capturing the interest rate decline.