Structural change, global R* and the missing-investment puzzle

Posted: 24 Jan 2023

See all articles by Andrew John Bailey

Andrew John Bailey

Bank of England; Bank of England - Prudential Regulation Authority

Ambrogio Cesa-Bianchi

Bank of England

Marco Garofalo

Bank of England; University of Oxford

Richard Harrison

Bank of England - Monetary Analysis

Nick McLaren

Bank of England

Rana Sajedi

Bank of England

Sophie Piton

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2022

Abstract

The world has undergone substantial structural change over recent decades, with profound implications for the long-run policy landscape. We focus on two key trends. First, the secular decline in risk-free interest rates, suggesting a fall in the long-run global equilibrium interest rate, Global R*. Using a structural model, we find that declining productivity growth and increasing longevity played the largest roles in explaining this fall. The second trend is the recorded weakness in investment, despite an increasing wedge between the return on capital and the risk-free rate. We use industry-level data for the United Kingdom to investigate the potential structural factors behind this ‘missing-investment puzzle’ and find a strong role for intangible capital.

Keywords: Structural change, equilibrium interest rates, investment

JEL Classification: E22, E43, J11

Suggested Citation

Bailey, Andrew John and Cesa-Bianchi, Ambrogio and Garofalo, Marco and Harrison, Richard and McLaren, Nick and Sajedi, Rana and Piton, Sophie, Structural change, global R* and the missing-investment puzzle (October 20, 2022). Bank of England Working Paper No. 997, Available at SSRN: https://ssrn.com/abstract=4335547

Andrew John Bailey

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bank of England - Prudential Regulation Authority

20 Moorgate
London, EC2R 6DA
United Kingdom

Ambrogio Cesa-Bianchi

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/ambropo/

Marco Garofalo

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of Oxford

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Richard Harrison

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Nick McLaren

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rana Sajedi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sophie Piton

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/site/sophiepiton/home

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