OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

The fall in real long-term government bond yields

Disentangling different drivers

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.


Keywords: Real interest rate, Monetary policy, Demand for safe assets, Demographic transition, Saving rate

J11: Labor and Demographic Economics / Demographic Economics / Demographic Trends, Macroeconomic Effects, and Forecasts;
C22: Mathematical and Quantitative Methods / Single Equation Models; Single Variables / Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes;
F31: International Economics / International Finance / Foreign Exchange;
E58: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Central Banks and Their Policies;
E52: Macroeconomics and Monetary Economics / Monetary Policy, Central Banking, and the Supply of Money and Credit / Monetary Policy;
E43: Macroeconomics and Monetary Economics / Money and Interest Rates / Interest Rates: Determination, Term Structure, and Effects