Low frequency drivers of the real interest rate: Empirical evidence for advanced economies

This article presents an empirical analysis of the underlying drivers of the real interest rate in advanced economies since 1980. We adopt a band spectrum regression approach, which allows us to study the link between the real interest rate and its determinants only over low frequencies, leaving aside business cycle fluctuations and high frequency noise. Spectral regressions are pooled across countries, allowing for country fixed effects. Our findings indicate that most of the long‐term movements of real interest rates are explained by the evolution of total factor productivity (with a specific role for human capital accumulation) and demographic trends. Monetary policy and credit developments, instead, appear to play a limited part. According to our estimates, over recent years the natural rate of interest has remained positive in the United States and United Kingdom, but fell below zero in the euro area and Japan. Finally, the paper provides an empirical contribution to the debate on secular stagnation, suggesting that supply‐side mechanisms were one of the most significant factors behind the fall in income growth in the advanced economies over the last two decades.