Why are real interest rates so low? Secular stagnation and the relative price of investment goods

Gregory Thwaites

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. I present an OLG model which explains these four trends with a fifth - the widespread fall in the relative price of investment goods. When capital goods are cheaper, a given quantity of saving buys more of them, but the resulting capital deepening lowers the marginal product of each one. Interest rates fall, reducing the user cost of housing, raise house prices and household debt. Preventing the accumulation of debt leads to a bigger fall in interest rates.

JEL-codes: E13 E22 E43 E60 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-07-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://eprints.lse.ac.uk/86328/ Open access version. (application/pdf)

Related works:
Working Paper: Why are real interest rates so low? Secular stagnation and the relative price of investment goods (2015)
Working Paper: Why are real interest rates so low? Secular stagnation and the relative price of investment goods (2014)
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