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The Circular Relationship Between Productivity Growth and Real Interest Rates

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  • Antonin Bergeaud
  • Gilbert Cette
  • Rémy Lecat

Abstract

In most advanced economies, both real interest rates and productivity growth have decreased since the early 1990s. In this paper, we explore the mechanism whereby a circular relationship links these two quantities. While productivity is a key driver of potential output which affects the level of interest rates, the level of interest rates is a determinant of the expected return from investment projects, and thus of the productivity level required for investment. In our model, absent of a technology shock, this specific relationship can only converge to an equilibrium where growth and interest rates are both low. We test this using macroeconomic data on 17 OECD countries and simulate the effect of a temporary productivity shock.

Suggested Citation

  • Antonin Bergeaud & Gilbert Cette & Rémy Lecat, 2019. "The Circular Relationship Between Productivity Growth and Real Interest Rates," Working papers 734, Banque de France.
    • Handle: RePEc:bfr:banfra:734
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    2. Alessandro Bellocchi & Edgar J. Sanchez Carrera & Giuseppe Travaglini, 2021. "What drives TFP long-run dynamics in five large European economies?," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(2), pages 569-595, July.
    3. Gilbert Cette & Aurélien Devillard & Vincenzo Spiezia, 2022. "Growth Factors in Developed Countries: A 1960–2019 Growth Accounting Decomposition," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(2), pages 159-185, June.
    4. Masera, Rainer, 2023. "The Challenges Eurozone Stagflation Poses for Households, Businesses and High-Debt Countries: Some Possible Solutions," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 76(4), pages 547-566.

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    More about this item

    Keywords

    : Productivity; Slowdown; Secular Stagnation; Interest Rates.;
    All these keywords.

    JEL classification:

    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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