By Nigel Jenkinson of the Bank’s Structural Economic Analysis Division.
Since the 1960s, gross national saving rates in the major industrial countries have fallen by nearly five percentage points of GDP. Long-term real interest rates have increased by about one percentage point to around 4%. Real rates rose quite sharply in 1994, returning to the high levels of the 1980s. What are the main reasons for these developments? Are high real rates likely to persist? What are the implications for economic growth and welfare? Should economic policy change as a result?
These issues prompted the Chancellor of the Exchequer to propose a comprehensive study of saving, investment and real interest rates by the G10 finance ministries and central banks. The Chancellor’s proposal was agreed in late 1994 and the G10 Deputies were charged with the task. The Deputies’ report was published in October 1995. The Bank of England played a full part in the study. Mervyn King, the Bank’s Chief Economist, chaired a working group which drew together the analytical material underpinning the report. In addition, three research papers which formed part of this analytical base were produced in the Bank.
This article describes the main conclusions of the G10 Deputies’ study and the supporting research conducted in the Bank of England. The first part summarises the study itself and highlights the policy recommendations. Bank research is described in the second half, placing particular emphasis on the links to the Deputies’ report.