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Patience Breeds Interest: The Rise of Societal Patience and the Fall of the Risk-free Interest Rate

Radoslaw Stefanski () and Alex Trew ()

No 202001, CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: The real risk-free rate of return has been declining for millennia. Using a novel, quantitative heterogenous-agent model of fertility, we show that an increasing societal rate of time preference -- or patience -- is critical in explaining this decline. Three empirical observations support our approach: experimental evidence finds significant heterogeneity in patience; patience is inter-generationally persistent; and, patience is also positively related with fertility. Given these facts, our model predicts that the population distribution of patience shifts over time toward those with higher patience. As average levels of patience rise, so more patient societies are willing to accept lower risk-free rates of return to induce them to save. By calibrating our model to the present-day distribution of patience across individuals, we are able to match the timing, size and pace of the decline in the risk-free rate over the last eight centuries.

Keywords: Heterogeneous agents; interest rates; patience; selection (search for similar items in EconPapers)
JEL-codes: E21 E43 J11 N30 O11 (search for similar items in EconPapers)
Date: 2020-02-08
New Economics Papers: this item is included in nep-mac
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