Gazing at r-star: A Hysteresis Perspective

Paul Beaudry, Katya Kartashova and Cesaire Meh

Staff Working Papers from Bank of Canada

Abstract: Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. We begin by presenting a simple explanation for this pattern that relies on integrating retirement and inter-temporal substitution motives in saving decisions. We then show how the interaction of these two saving motives can have profound implications in terms of the shape of asset demands, the possibility of multiple steady state real interest rates, and a potential role for monetary policy to influence the long-run evolution of real rates. The framework highlights how an inflationary episode followed by a strong monetary response, as we are currently witnessing, can have long-term implications for real interest rates.

Keywords: Economic models; Fiscal policy; Inflation and prices; Inflation targets; Interest rates; Monetary policy; Monetary policy framework (search for similar items in EconPapers)
JEL-codes: E21 E31 E43 E52 E58 E62 G51 H6 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2023-01
New Economics Papers: this item is included in nep-age, nep-ban, nep-cba, nep-dge and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2023/01/swp2023-5.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-5

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().