The third candidate explanation is that central banks are the architects of the apparently low trend real rate by pushing up demand for long-dated risk free assets. This argument is, I think, largely mistaken for some of the reasons I alluded to earlier. QE will have affected the price and hence the yields on bonds. Indeed, that is part of the objective. Central banks make use of asset purchases when their preferred policy instruments run into their effective lower bounds. But QE will not have affected the natural rate. QE acts as a substitute for changes in Bank Rate, taking the effective or “shadow” policy rate – Bank Rate adjusted for the impact of QE – down below zero and towards the extraordinarily low natural rate. In other words, central banks are not causing low underlying interest rates, we are responding to them. Policy Implications  What are the policy implications in a world in which the natural rate remains around zero and all else equal will not rise back to close to pre-crisis levels even as headwinds abate? I think there are two main implications for central banks. First, and most obviously, if the natural rate is going to be lower on average then the same will be true of the policy rate.
In the next few years, job growth picked up sharply and real estate markets soared, a clear sign that a growing number of people had regained confidence in the city. But, even during the booming 1980s, crime rates continued to increase—it wasn’t until 1990 that crime rates peaked and began a long downward trend. I returned to New York in 1983. The draw was an employment opportunity in finance. At the time, the city’s circumstances were improving but crime was still high, and there were still lots of problems caused by years of underinvestment. For example, I recall that the New York City subway system at the time was a near-wreck, with train speeds sharply reduced in many areas due to poor track conditions and dilapidated infrastructure. But, the seeds of improvement were in place. The financial services industry was beginning a long boom marked by financial market innovation and the rapid development of the nation’s debt capital markets—a boom that ended with the financial crisis. When I arrived, the build-out of the Battery Park City neighborhood was just starting. My first year, I lived at Gateway Plaza, which was the first big apartment complex in Battery Park City. However, it was early days and the nearest grocery store was about half a mile away north on West Street! Although a major economic downturn throughout the Northeast in the early 1990s took its toll on New York City—especially on employment and home prices—the city’s population continued to grow and its crime rate began to decline.