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Why Have Interest Rates Fallen far Below the Return on Capital

M. Marx, Benoit Mojon () and Francois Velde ()

Working papers from Banque de France

Abstract: Risk-free rates have been falling since the 1980s. The return on capital, defined here as the profits over the stock of capital, has not. We analyze these trends in a calibrated OLG model designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Declining labor force and productivity growth imply a limited decline in real interest rates and deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium. If we allow for a change in the (perceived) risk to productivity growth to fit the data, we find that the decline in the risk-free rate requires an increase in the borrowing capacity of the indebted agents in the model, consistent with the increase in the sum of public and private debt since the crisis but at odds with a deleveraging-based explanation put forth in Eggertsson and Krugman (2012).

Keywords: secular stagnation; interest rates; risk; return on capital. (search for similar items in EconPapers)
JEL-codes: E00 E40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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