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Some Evidence on Secular Drivers of US Safe Real Rates†

Some Evidence on Secular Drivers of US Safe Real Rates† AbstractWe study long-run correlations between safe real interest rates in the United States and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an 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 find that safe real interest rates are correlated as expected with demographic measures. For example, the long-run 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 find 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. (JEL E21, E22, E24, E43, E52) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Some Evidence on Secular Drivers of US Safe Real Rates†

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20180005
Publisher site
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Abstract

AbstractWe study long-run correlations between safe real interest rates in the United States and over 30 variables that have been hypothesized to influence real rates. The list of variables is motivated by an 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 find that safe real interest rates are correlated as expected with demographic measures. For example, the long-run 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 find 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. (JEL E21, E22, E24, E43, E52)

Journal

American Economic Journal: Macroeconomics – American Economic Association

Published: Oct 1, 2019

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