Some Evidence on Secular Drivers of US Safe Real Rates

Abstract

We study long-run correlations between safe real interest rates in the United States and over 20 variables that have been hypothesized to infl uence real rates. The list of variables is motivated by the familiar intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We fi nd that safe real interest rates are correlated as expected with demographic measures. For example, the longrun correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long-run correlation with the proportion of 40-to 64-year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not fi nd productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long-run correlations that are statistically or economically large in some samples and by some measures but not in others.

Some Evidence on Secular Drivers of US Safe Real Rates

“…Nonetheless, the point estimates suggest considerable economic significance for these two correlates. Lunsford and West (2017) has additional results showing economic significance for other correlates. 13…”

On secular stagnation and low interest rates: Demography matters

“…With regard to supply‐side factors, Gordon () examines the role of technological innovation and argues that technological progress has slowed in the last decades to its historical average, after a period of sustained growth between 1930 and 1980. However, there is no clear evidence of the role of productivity growth in determining real interest rates (Lunsford & West, ). Blanchard, Furceri, and Pescatori () argue that the factors responsible for the decline of real interest rates before the global financial crisis are unlikely to be reversed.…”

Global Trends in Interest Rates

“…In light of the mixed evidence on the extent to which interest rates and consumption growth actually correlate even at low frequencies (see, e.g., Hamilton et al, 2016;Lunsford and West, 2017), our proposed model of the stochastic discount does not connect the two very tightly, allowing for other factors to shift that relationship. In particular, we assume that…”

“…2 In an attempt to shed light on this debate, a number of empirical papers have investigated the drivers of secular movements in real interest rates. Lunsford and West (2017), for instance, study long time-series for the United States. They find that demographic factors are robustly correlated with real interest rates, while productivity growth is not.…”