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Has the real rate of return “depreciated”?

Author

Listed:
  • Carl-Johan Dalgaard

    (CEPR
    University of Copenhagen
    Danish Economic Councils)

  • Morten Olsen

    (University of Copenhagen)

Abstract

The average depreciation rate in the United States has increased since the 1970s, a pattern most likely matched in other advanced economies. We argue that a higher depreciation rate has reduced the risk-free interest rate. We do so in a quantitative overlapping-generations model which allows for risk-premia and market power. We show that the importance of the rate of depreciation on the risk-free interest rate depends crucially on the elasticity of intertemporal substitution as well as the size of market power. Our calibrated model shows that higher depreciation plausibly reduced the risk-free rate by 30 basis points over the past half century. We contrast our results with models using a representative-agent framework (Farhi and Gourio in Accounting for macro-finance trends: market power, intangibles, and risk premia. Brookings papers on economic activity, 147, 2019) which typically do not find a role for the rate of depreciation.

Suggested Citation

  • Carl-Johan Dalgaard & Morten Olsen, 2025. "Has the real rate of return “depreciated”?," Journal of Economic Growth, Springer, vol. 30(1), pages 49-85, March.
    • Handle: RePEc:kap:jecgro:v:30:y:2025:i:1:d:10.1007_s10887-024-09248-w
    DOI: 10.1007/s10887-024-09248-w
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    More about this item

    Keywords

    The real rate of interest; Capital depreciation; Growth theory; Savings motive;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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