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Structural change, global R* and the missing-investment puzzle

Author

Listed:
  • Bailey, Andrew

    (Bank of England)

  • Cesa-Bianchi, Ambrogio

    (Bank of England)

  • Garofalo, Marco

    (Bank of England)

  • Harrison, Richard

    (Bank of England)

  • McLaren, Nick

    (Bank of England)

  • Sajedi, Rana

    (Bank of England)

  • Piton, Sophie

    (Bank of England)

Abstract

The world has undergone substantial structural change over recent decades, with profound implications for the long-run policy landscape. We focus on two key trends. First, the secular decline in risk-free interest rates, suggesting a fall in the long-run global equilibrium interest rate, Global R*. Using a structural model, we find that declining productivity growth and increasing longevity played the largest roles in explaining this fall. The second trend is the recorded weakness in investment, despite an increasing wedge between the return on capital and the risk-free rate. We use industry-level data for the United Kingdom to investigate the potential structural factors behind this ‘missing-investment puzzle’, and find a strong role for intangible capital.

Suggested Citation

  • 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.
    • Handle: RePEc:boe:boeewp:0997
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    More about this item

    Keywords

    Structural change; equilibrium interest rates; investment;
    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
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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