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Why Are Real Interest Rates So Low? The Role of the Relative Price of Investment Goods

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  • Rana Sajedi

    (Bank of England)

  • Gregory Thwaites

    (Bank of England)

Abstract

Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. We present a calibrated OLG model which quantifies how much of these four trends can be explained with a fifth—the widespread fall in the relative price of investment goods. Relative to other explanations for low real interest rates, this trend is important because it can also account for the fall in nominal investment rates. The model can reproduce a small but economically significant part of the observed fall in interest rates and rises in house prices and household debt, and a larger part of the fall in the investment rate.

Suggested Citation

  • Rana Sajedi & Gregory Thwaites, 2016. "Why Are Real Interest Rates So Low? The Role of the Relative Price of Investment Goods," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 635-659, November.
    • Handle: RePEc:pal:imfecr:v:64:y:2016:i:4:d:10.1057_s41308-016-0016-y
    DOI: 10.1057/s41308-016-0016-y
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    Cited by:

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    2. Lukasz Rachel & Lawrence H. Summers, 2019. "On Secular Stagnation in the Industrialized World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 1-76.
    3. Bailey, Andrew & Cesa-Bianchi, Ambrogio & Garofalo, Marco & Harrison, Richard & McLaren, Nick & Sajedi, Rana & Piton, Sophie, 2023. "Structural change, global R* and the missing-investment puzzle," Bank of England working papers 997, Bank of England.
    4. Marx, Magali & Mojon, Benoît & Velde, François R., 2021. "Why have interest rates fallen far below the return on capital?," Journal of Monetary Economics, Elsevier, vol. 124(S), pages 57-76.
    5. Jiaqian Chen & Daria Finocchiaro & Jesper Linde & Karl Walentin, 2023. "The costs of macroprudential deleveraging in a liquidity trap"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 991-1011, December.
    6. Luis Buluz & Filip Novokmet & Moritz Schularick, 2022. "The Anatomy of the Global Saving Glut," SciencePo Working papers Main hal-03881419, HAL.
    7. Mr. Philip Barrett, 2018. "Interest-Growth Differentials and Debt Limits in Advanced Economies," IMF Working Papers 2018/082, International Monetary Fund.
    8. Jan Behringer, 2019. "Factor shares and the rise in corporate net lending," IMK Working Paper 202-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. Zhang, Xiaoge, 2022. "Belief-driven growth slowdowns and zero-bounded risk-free rate," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    10. Jan Behringer, 2019. "Factor shares and the rise in corporate net lending," IMK Working Paper 202-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    11. Pasche, Markus, 2018. "Degrowth and sustainable public finance," MPRA Paper 87109, University Library of Munich, Germany.
    12. Kurt G. Lunsford & Kenneth D. West, 2019. "Some Evidence on Secular Drivers of US Safe Real Rates," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 113-139, October.
    13. Reona Hagiwara, 2023. "Aging, Health Risk, and Interest Rates," Working Papers 2303, Waseda University, Faculty of Political Science and Economics.
    14. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
    15. Yudai Hatayama & Yuto Iwasaki & Kyoko Nakagami & Tatsuyoshi Okimoto, 2024. "Globalization and Its Growing Impact on the Natural Rates of Interest in Developed Economies," Bank of Japan Working Paper Series 24-E-13, Bank of Japan.
    16. Cesa-Bianchi, Ambrogio & Harrison, Richard & Sajedi, Rana, 2022. "Decomposing the drivers of Global R," Bank of England working papers 990, Bank of England.
    17. Noëmie Lisack & Rana Sajedi & Gregory Thwaites, 2021. "Population Aging and the Macroeconomy," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 43-80, June.
    18. Perotti, Enrico & Döttling, Robin, 2019. "Redistributive Growth," CEPR Discussion Papers 13984, C.E.P.R. Discussion Papers.
    19. Glick, Reuven, 2020. "r* and the global economy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    20. Kösem, Sevim, 2021. "Income inequality, mortgage debt and house prices," Bank of England working papers 921, Bank of England.
    21. Manuel Rupprecht, 2020. "Income and wealth of euro area households in times of ultra-loose monetary policy: stylised facts from new national and financial accounts data," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 281-302, May.

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    More about this item

    Keywords

    E22; E43; E60; E13;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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