Why have interest rates fallen far below the return on capital
Benoit Mojon () and
François R. Velde
No 794, BIS Working Papers from Bank for International Settlements
Risk-free rates have been falling since the 1980s while the return on capital has not. We analyse these trends in a calibrated overlapping-generations model with recursive preferences, designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium, and declining labour force and productivity growth imply only a limited decline in real interest rates. 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.
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-dge and nep-mac
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Working Paper: Why Have Interest Rates Fallen Far Below the Return on Capital (2018)
Working Paper: Why Have Interest Rates Fallen far Below the Return on Capital (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:794
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