Why Have Interest Rates Fallen Far Below the Return on Capital

39 Pages Posted: 12 Aug 2019

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: July 9, 2019

Abstract

Risk-free rates have been falling since the 1980s while the return on capital has not. We analyse these trends in a calibrated overlapping-generations model with recursive preferences, designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium, and declining labour force and productivity growth imply only a limited decline in real interest rates. 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.

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 (July 9, 2019). BIS Working Paper No. 794, Available at SSRN: https://ssrn.com/abstract=3420334

Magali Marx (Contact Author)

Banque de France ( email )

Paris
France

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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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