Understanding low interest rates

The customary neoclassical model of interest rate determination is neither rooted in the institutional set-up of the credit markets nor supported by the data.

The Wicksell-Mises-Hayek model of the credit and business cycle offers a much better description of reality. In accordance with this model, we find short-term interest rates to have a strong influence on long-term interest rates and not vice versa, as suggested by the neoclassical model. We also find population ageing not to exert downward pressure on long-term interest rates (and find the opposite effect in half of our sample countries).

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