Have the interest rate theorists got it totally wrong?

According to the consensus (and the mantra of authorities), economic growth can now continue on an accelerating path as fiscal headwinds diminish, aided by an end to the deleveraging process. A key assumption is that stimulus from monetary policy has finally been sufficient to reignite the ‘animal spirits’ that will underpin further economic gains. Meanwhile, there is conviction that a gradual normalisation of official interest rates is justified, on the assumption that, in the longer term, rates should approximate to the nominal growth rate of the economy. However, we think there ...