Why Have Interest Rates Fallen Far Below the Return on Capital

29 Pages Posted: 10 Jun 2017

See all articles by Magali Marx

Magali Marx

Banque de France

Benoît Mojon

Bank for International Settlements (BIS)

Francois R. Velde

Federal Reserve Bank of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2017


Risk-free rates have been falling since the 1980s. The return on capital, defined here as the profits over the stock of capital, has not. We analyze these trends in a calibrated OLG model designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Declining labor force and productivity growth imply a limited decline in real interest rates and deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium. If we allow for a change in the (perceived) risk to productivity growth to fit the data, we find that the decline in the risk-free rate requires an increase in the borrowing capacity of the indebted agents in the model, consistent with the increase in the sum of public and private debt since the crisis but at odds with a deleveraging-based explanation put forth in Eggertsson and Krugman (2012).

Keywords: secular stagnation, interest rates, risk, return on capital

JEL Classification: E00, E40

Suggested Citation

Marx, Magali and Mojon, Benoît and Velde, Francois R., Why Have Interest Rates Fallen Far Below the Return on Capital (May 1, 2017). Banque de France Working Paper No. 630, Available at SSRN: https://ssrn.com/abstract=2983681 or http://dx.doi.org/10.2139/ssrn.2983681

Magali Marx

Banque de France ( email )


Benoît Mojon (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

Francois R. Velde

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Economic Research
Chicago, IL 60604-1413
United States
(312) 322-2526 (Phone)
(312) 322-2357 (Fax)

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