The Circular Relationship Between Productivity Growth and Real Interest Rates

39 Pages Posted: 24 Oct 2019

See all articles by Antonin Bergeaud

Antonin Bergeaud

Banque de France

Gilbert Cette

Banque de France

Remy Lecat

Banque de France

Date Written: October 2019

Abstract

In most advanced economies, both real interest rates and productivity growth have decreased since the early 1990s. In this paper, we explore the mechanism whereby a circular relationship links these two quantities. While productivity is a key driver of potential output which affects the level of interest rates, the level of interest rates is a determinant of the expected return from investment projects, and thus of the productivity level required for investment. In our model, absent of a technology shock, this specific relationship can only converge to an equilibrium where growth and interest rates are both low. We test this using macroeconomic data on 17 OECD countries and simulate the effect of a temporary productivity shock.

Keywords: Productivity, Slowdown, Secular Stagnation, Interest Rates

JEL Classification: O43, O47, O57, E43

Suggested Citation

Bergeaud, Antonin and Cette, Gilbert and Lecat, Remy, The Circular Relationship Between Productivity Growth and Real Interest Rates (October 2019). Banque de France Working Paper No. 734, October 2019, Available at SSRN: https://ssrn.com/abstract=3474897 or http://dx.doi.org/10.2139/ssrn.3474897

Antonin Bergeaud (Contact Author)

Banque de France ( email )

Paris
France

Gilbert Cette

Banque de France ( email )

Paris
France

Remy Lecat

Banque de France ( email )

Paris
France

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