The impact of the COVID-19 crisis on the equilibrium interest rate

The lockdown of economies during the COVID-19 crisis creates conditions in which private sector demand may fall unboundedly while precautionary savings increase. This column argues that the crisis will push down the equilibrium real interest rate further, which has been trending down since the 1980s. However, higher government spending to combat the crisis could counter this trend. The overall effect on the equilibrium interest rate will depend partly on the extent to which the increasing public debt can provide the private sector with a safe asset for holding precautionary savings.

Πηγή: Voxeu

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