The Circular Relationship Between Productivity Growth and Real Interest Rates

Antonin Bergeaud, Gilbert Cette and Rémy Lecat

Working papers from Banque de France

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. (search for similar items in EconPapers)
JEL-codes: E43 O43 O47 O57 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2019
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:734

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