“Running out of room: revisiting the 3D perspective on low interest rates," Speech by Gertjan Vlieghe at the London School of Economics. Woodford, M. (2003). “Interest and Prices: Foundations of a Theory of Monetary Policy  ”,  Princeton University Press, Princeton (2003). 1. This speech will use a variety of real interest rate estimates, all of which adjust nominal interest rates for expected inflation. 2. For example, some approaches take a ‘longer-run’ perspective, according to which the equilibrium interest rate is the real rate expected to prevail after the economy has adjusted to any cyclical fluctuations (Laubach and Williams, 2003). Other approaches allow for short-term fluctuations in the equilibrium interest rate, defining it as the real rate that would prevail if prices were flexible (Woodford, 2003). 3. See Bank of England (2018) and Bailey et al. (2022). 4. For example, the analysis in Bank of England (2018) assesses that during the global financial crisis, headwinds to demand (including heightened uncertainty and tighter financial conditions) prompted a large fall in the cyclical component that took many years to dissipate. 5. The focus of this speech is on the longer-term structural trends and what might be driving them, for which longer time series of data are preferred. To enable cross-country comparisons, the real rate data are constructed by adjusting market measures of nominal interest rates for inflation. Consistent with the structural model analysis below, the  Page 21 sample is truncated in 2015. Del Negro et al. (2019), Holston et al. (2017) and Hamilton et al.
[6] Understanding the underlying structural trends that drive this balance requires a structural model. Recent research by staff at the Bank has developed a model of the world economy that brings together several key structural factors that could account for the decline in Global R*. [7] These are productivity growth, population growth, longevity, the relative price of capital, and government debt. The structural model generates a path for Global R*, as well as a decomposition of the contribution of each of these factors. Some key results of this exercise are laid out in Table 1. This includes both the baseline model simulation, and a range of alternatives that vary some key underlying parameters and assumptions. It focuses on the period since 1985, given the attention it has received in much of the existing literature. The sample ends in 2015 due to the process used to extract the underlying trends in the structural factors and the timeliness of some of the data required for the simulation. [8] Given the focus on slow-moving structural drivers, omission of the most recent data is unlikely to have a material effect on the estimate of the trend real rate. And I will come on to consider the more recent period and the potential impact of the Covid pandemic later in the speech.