Question

Question four Why are long-term interest rates so low? Do you agree with Ben S. Bernanke's explanation? (20 points)

Answer 1

There are three components that could help explain the lowered level of long-term interest rate - expected inflation, expectations about the future path of real short-term interest rates, and a term premium.

Currently, all three components are helping to keep longer-term interest rates low. Inflation is low and expected to remain so, so lenders are not demanding higher returns to compensate for anticipated losses in their purchasing power. Short-term interest rates are also expected to remain low, as bondholders appear pessimistic about growth prospects and the sustainable returns to capital in the coming years. When short-term rates are expected to remain low, longer-term rates tend to get bid down as well.

Typically, long-term yields are higher than short-term yields, but over time analysis suggests that the term premiums have generally trended down since the early 1980s.

Yes, I agree with Ben S. Bernanke's explanation. The long-term interest rates remain close to their historical lows. A variety of structural factors, notably slower productivity growth and a surplus of global saving, likely have lowered expectations of steady-state interest rates and pushed down long-term yields through the expectations component. In addition, accommodative monetary policy in the United States and abroad appears to have lowered the term premium on long-term bonds. Also, the investors have a gloomy economic outlook and anticipate low rates of inflation and output growth to persist.