Has the real rate of return “depreciated”?

Carl-Johan Dalgaard () and Morten Olsen ()
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Carl-Johan Dalgaard: CEPR
Morten Olsen: University of Copenhagen

Journal of Economic Growth, 2025, vol. 30, issue 1, No 2, 49-85

Abstract: Abstract The average depreciation rate in the United States has increased since the 1970s, a pattern most likely matched in other advanced economies. We argue that a higher depreciation rate has reduced the risk-free interest rate. We do so in a quantitative overlapping-generations model which allows for risk-premia and market power. We show that the importance of the rate of depreciation on the risk-free interest rate depends crucially on the elasticity of intertemporal substitution as well as the size of market power. Our calibrated model shows that higher depreciation plausibly reduced the risk-free rate by 30 basis points over the past half century. We contrast our results with models using a representative-agent framework (Farhi and Gourio in Accounting for macro-finance trends: market power, intangibles, and risk premia. Brookings papers on economic activity, 147, 2019) which typically do not find a role for the rate of depreciation.

Keywords: The real rate of interest; Capital depreciation; Growth theory; Savings motive (search for similar items in EconPapers)
JEL-codes: E13 E21 E43 O4 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10887-024-09248-w

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