The return on capital and its determinants in recent times

Since the 1980s the divergence between the returns on capital and on safe assets has increased. This box examines what might account for this wedge and finds that, while the capital risk premium is the main factor, partly reflecting the demand for safe assets and a general decline in their supply, mark-ups also play a role. Since the pandemic, divergence has increased in the euro area, while it has remained broadly stable, albeit wider, in the United States, with mark-ups playing a greater role. During this period, the contribution from the risk premium has marginally increased in the euro area, whereas mark-ups have slightly decreased. In the United States, both the risk premium and mark-ups are largely unchanged. The elevated risk premium, to the extent that it reflects capital market imperfections, is one potential explanation for subdued investment levels in the euro area, which also pose a challenge to meeting the substantial investment needed to advance the green transition. JEL Classification: E01, E6