Low Real Interest Rates
by Lawrence H. White
The Conversation
December 10th, 2008
Casey Mulligan has asked for a time series for real interest rates so we can judge just how low they were. Here's the clearest and most up-to-date picture I could find, from Christopher J. Neely and David E. Rapach, "Real Interest Rate Persistence: Evidence and Implications," St. Louis Federal Reserve Bank Review 90 (November-December 2008), p. 628 (Figure 2). It shows that the ex post real interest rate (their measure is the U.S. three-month Treasury bill rate minus the CPI inflation rate) was below 1.82 percent, its post-1989 "regime-specific mean," roughly from mid-2001 to mid-2006. It was persistently negative (with one brief exception) for more than three years during this stretch, early 2002 to mid 2005.
Unfortunately Neely and Rapach do not report the underlying time series from which we could satisfy Professor Mulligan's request for "the number of basis points by which those rates were low during the boom." The raw data on nominal interest rates and CPI levels from which precise ex post real interest rates can be calculated are readily available at the St. Louis Fed's FRED database.
[...] first half of the last decade was largely a result of easy credit by the Federal Reserve – that low interest rates made it too easy for too many people to borrow to purchase a new, bigger [...]