Some Evidence on Secular Drivers of U.S. Safe Real Rates

32 Pages Posted: 26 Nov 2018

See all articles by Kurt G. Lunsford

Kurt G. Lunsford

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Kenneth D. West

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

Abstract

We study long run correlations between safe real interest rates in the U.S. and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We find that safe real interest rates are correlated as expected with demographic measures. For example, the long run correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long run correlation with the proportion of 40 to 64 year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not find productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long run correlations that are statistically or economically large in some samples and by some measures but not in others.

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Suggested Citation

Lunsford, Kurt G. and West, Kenneth D., Some Evidence on Secular Drivers of U.S. Safe Real Rates (November 2018). NBER Working Paper No. w25288. Available at SSRN: https://ssrn.com/abstract=3290423

Kurt G. Lunsford (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

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Cleveland, OH 44101-1387
United States

Kenneth D. West

University of Wisconsin - Madison - Department of Economics ( email )

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United States
608-262-0033 (Phone)
608-262-2033 (Fax)

National Bureau of Economic Research (NBER) ( email )

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