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Some Evidence on Secular Drivers of US Safe Real Rates

Kurt Lunsford and Kenneth West ()

No 1723, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: We study long-run correlations between safe real interest rates in the United States and over 20 variables that have been hypothesized to influence real rates. The list of variables is motivated by the familiar intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We find that safe real interest rates are correlated as expected with demographic measures. For example, the long-run correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long-run correlation with the proportion of 40- to 64-year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not find productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long-run correlations that are statistically or economically large in some samples and by some measures but not in others.

Keywords: productivity; lowpass filtered correlation; steady state interest rate; natural rate of interest; demographics; low-frequency correlation (search for similar items in EconPapers)
JEL-codes: C32 E21 E22 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2017-12-21, Revised 2017-12-21
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Related works:
Journal Article: Some Evidence on Secular Drivers of US Safe Real Rates (2019) Downloads
Working Paper: Some Evidence on Secular Drivers of U.S. Safe Real Rates (2018) Downloads
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DOI: 10.26509/frbc-wp-201723

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