The author uses a simple neoclassical model to show how liquidity shocks at home and abroad can contribute to trade imbalances and low real interest rates. The author’s interpretation is consistent with Bernanke’s (2005) “global saving glut” hypothesis.

The real interest rate plays a central role in many important financial and macroeconomic models, including the consumption-based asset pricing model, neoclassical growth model, and models of the monetary transmission mechanism. The authors selectively survey the empirical literature that...

This article was originally presented as a speech to the Money Marketeers, New York, New York, June 14, 2005.