Why Have Interest Rates Fallen Far Below the Return on Capital

36 Pages Posted: 14 Feb 2018 Last revised: 29 Apr 2020

See all articles by Magali Marx

Magali Marx

Banque de France

Benoit Mojon

Banque de France

Francois R. Velde

Federal Reserve Bank of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: January, 2018

Abstract

Risk-free rates have been falling since the 1980s while the return on capital has not. We analyze these trends in a calibrated OLG model with recursive preferences, 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: Interest rates, secular stagnation, risk, return on capital

JEL Classification: E00, E40

Suggested Citation

Marx, Magali and Mojon, Benoit and Velde, Francois R., Why Have Interest Rates Fallen Far Below the Return on Capital (January, 2018). FRB of Chicago Working Paper No. WP-2018-1, Available at SSRN: https://ssrn.com/abstract=3121581

Magali Marx (Contact Author)

Banque de France ( email )

Paris
France

Benoit Mojon

Banque de France ( email )

Paris
France

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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