The Slowdown and Real Interest Rates

Edmund Phelps, Hian Hoon and Gylfi Zoega ()
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Gylfi Zoega: University of Iceland

Chapter 2 in The Great Economic Slowdown, 2023, pp 11-29 from Springer

Abstract: Abstract The capital market equilibrium is derived wherein the equilibrium real rate of interest equalizes the supply of saving (coming from households) with the demand for capital (coming from firms). The model is then used to show how a fall in the rate of productivity growth lowers the equilibrium interest rate by increasing the supply of saving in the capital market in a one-sector neoclassical model. A fall in the rate of population growth is shown to have the same effect. Public debt is shown to create a wedge between the supply of wealth and the demand for capital, raising real interest rates and crowding out the capital stock.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-31441-4_2

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DOI: 10.1007/978-3-031-31441-4_2

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