IDEAS home Printed from https://ideas.repec.org/p/gla/glaewp/2020-03.html
   My bibliography  Save this paper

Patience Breeds Interest: The Rise of Societal Patience and the Fall of the Risk-free Interest Rate

Author

Listed:
  • Radoslaw (Radek) Stefanski
  • Alex Trew

Abstract

The risk-free rate of return has been declining in real terms over millennia. We isolate the role of time preference – or patience – in explaining this decline. Three facts support our approach: experimental evidence finds significant heterogeneity in patience; individual preference characteristics are highly intergenerationally persistent; and, longitudinal data shows that patience is positively related with fertility decisions. Together these suggest we should expect average societal levels of patience to increase over time as the composition of the population shifts towards ever more patient dynasties. We test this mechanism in a Barro-Becker model of fertility with heterogeneous dynasties. We use the present day distribution of patience to calibrate the model. We are able match – both quantitatively and qualitatively – the decline in the risk-free return over the last eight centuries.

Suggested Citation

  • Radoslaw (Radek) Stefanski & Alex Trew, 2020. "Patience Breeds Interest: The Rise of Societal Patience and the Fall of the Risk-free Interest Rate," Working Papers 2020-03, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2020-03
    as

    Download full text from publisher

    File URL: https://www.gla.ac.uk/media/Media_709851_smxx.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alfani, Guido & Murphy, Tommy E., 2017. "Plague and Lethal Epidemics in the Pre-Industrial World," The Journal of Economic History, Cambridge University Press, vol. 77(1), pages 314-343, March.
    2. Caselli, Francesco, 2005. "Accounting for Cross-Country Income Differences," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 9, pages 679-741, Elsevier.
    3. Del Negro, Marco & Giannone, Domenico & Giannoni, Marc P. & Tambalotti, Andrea, 2019. "Global trends in interest rates," Journal of International Economics, Elsevier, vol. 118(C), pages 248-262.
    4. Doepke, M. & Tertilt, M., 2016. "Families in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1789-1891, Elsevier.
    5. Chowdhury, Shyamal & Sutter, Matthias & Zimmermann, Klaus F., 2018. "Evaluating intergenerational persistence of economic preferences: A large scale experiment with families in Bangladesh," GLO Discussion Paper Series 183, Global Labor Organization (GLO).
    6. Daniel Barth & Nicholas W. Papageorge & Kevin Thom, 2020. "Genetic Endowments and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 128(4), pages 1474-1522.
    7. Matthias Doepke & Giuseppe Sorrenti & Fabrizio Zilibotti, 2019. "The Economics of Parenting," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 55-84, August.
    8. Bennett, Patrick & Ravetti, Chiara & Wong, Po Yin, 2021. "Losing in a boom: Long-term consequences of a local economic shock for female labour market outcomes," Labour Economics, Elsevier, vol. 73(C).
    9. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, May.
    10. Michael F. Lovenheim & Kevin J. Mumford, 2013. "Do Family Wealth Shocks Affect Fertility Choices? Evidence from the Housing Market," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 464-475, May.
    11. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    12. Vischer, Thomas & Dohmen, Thomas & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert G., 2013. "Validating an ultra-short survey measure of patience," Economics Letters, Elsevier, vol. 120(2), pages 142-145.
    13. Melissa S. Kearney & Riley Wilson, 2018. "Male Earnings, Marriageable Men, and Nonmarital Fertility: Evidence from the Fracking Boom," The Review of Economics and Statistics, MIT Press, vol. 100(4), pages 678-690, October.
    14. Schmelzing, Paul, 2020. "Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018," Bank of England working papers 845, Bank of England.
    15. Rogers, Alan R, 1994. "Evolution of Time Preference by Natural Selection," American Economic Review, American Economic Association, vol. 84(3), pages 460-481, June.
    16. Robson, Arthur J., 1996. "A Biological Basis for Expected and Non-expected Utility," Journal of Economic Theory, Elsevier, vol. 68(2), pages 397-424, February.
    17. Allen, Robert C., 2001. "The Great Divergence in European Wages and Prices from the Middle Ages to the First World War," Explorations in Economic History, Elsevier, vol. 38(4), pages 411-447, October.
    18. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 5266, London School of Economics and Political Science, LSE Library.
    19. Arrow, K. & Cropper, M. & Gollier, C. & Groom, B. & Heal, G. & Newell, R. & Nordhaus, W. & Pindyck, R. & Pizer, W. & Portney, P. & Sterner, T. & Tol, R. S. J. & Weitzman, Martin L., 2013. "Determining Benefits and Costs for Future Generations," Scholarly Articles 12841963, Harvard University Department of Economics.
    20. Tamura, Robert, 1996. "From decay to growth: A demographic transition to economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1237-1261.
    21. Broadberry, Stephen & Wallis, John, 2017. "Growing, Shrinking and Long Run Economic Performance: Historical Perspectives on Economic Development," CEPR Discussion Papers 11973, C.E.P.R. Discussion Papers.
    22. Levy, Moshe, 2015. "An evolutionary explanation for risk aversion," Journal of Economic Psychology, Elsevier, vol. 46(C), pages 51-61.
    23. Andreas Fagereng & Magne Mogstad & Marte Rønning, 2021. "Why Do Wealthy Parents Have Wealthy Children?," Journal of Political Economy, University of Chicago Press, vol. 129(3), pages 703-756.
    24. J. B. Taylor & Harald Uhlig (ed.), 2016. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 2, number 2.
    25. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    26. David N. Weil & Oded Galor, 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond," American Economic Review, American Economic Association, vol. 90(4), pages 806-828, September.
    27. Caselli, Francesco, 2005. "Accounting for cross-country income differences," LSE Research Online Documents on Economics 3567, London School of Economics and Political Science, LSE Library.
    28. Sule Alan & Martin Browning, 2010. "Estimating Intertemporal Allocation Parameters using Synthetic Residual Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1231-1261.
    29. Michael Bar & Oksana Leukhina, 2010. "Demographic Transition and Industrial Revolution: A Macroeconomic Investigation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 424-451, April.
    30. Allen M. Featherstone & Timothy G. Baker, 1987. "An Examination of Farm Sector Real Asset Dynamics: 1910–85," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(3), pages 532-546.
    31. Gert G. Wagner & Joachim R. Frick & Jürgen Schupp, 2007. "The German Socio-Economic Panel Study (SOEP) – Scope, Evolution and Enhancements," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 127(1), pages 139-169.
    32. Clark, Gregory, 1988. "The cost of capital and medieval agricultural technique," Explorations in Economic History, Elsevier, vol. 25(3), pages 265-294, July.
    33. Robert A. Becker, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 375-382.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Radoslaw (Radek) Stefanski & Alex Trew, 2021. "Selection, Patience, and the Interest Rate (updated 2023)," Working Papers 2020_03, Business School - Economics, University of Glasgow.
    2. Radoslaw Stefanski & Alex Trew, 2020. "Selection, Patience, and the Interest Rate," Discussion Paper Series, School of Economics and Finance 202002, School of Economics and Finance, University of St Andrews, revised 23 Jul 2021.
    3. Radoslaw (Radek) Stefanski & Alex Trew, 2020. "Patience Breeds Interest: The Rise of Societal Patience and the Fall of the Risk-free Interest Rate," Working Papers 2020-03, Business School - Economics, University of Glasgow.
    4. Sturgill, Brad, 2012. "The relationship between factor shares and economic development," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1044-1062.
    5. Tamura, Robert & Dwyer, Jerry & Devereux, John & Baier, Scott, 2019. "Economic growth in the long run," Journal of Development Economics, Elsevier, vol. 137(C), pages 1-35.
    6. Herrendorf, Berthold & Rogerson, Richard & Valentinyi, Ákos, 2014. "Growth and Structural Transformation," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 6, pages 855-941, Elsevier.
    7. Michael A. Clemens & Claudio Montenegro & Lant Pritchett, 2016. "Bounding the Price Equivalent of Migration Barriers," CID Working Papers 316, Center for International Development at Harvard University.
    8. Jerzmanowski, Michal & Tamura, Robert, 2019. "Directed technological change & cross-country income differences: A quantitative analysis," Journal of Development Economics, Elsevier, vol. 141(C).
    9. Osea Giuntella & Lorenzo Rotunno & Luca Stella, 2021. "Trade Shocks, Fertility, and Marital Behavior," DISCE - Working Papers del Dipartimento di Economia e Finanza def100, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    10. Dalgaard, Carl-Johan & Strulik, Holger, 2013. "The history augmented Solow model," European Economic Review, Elsevier, vol. 63(C), pages 134-149.
    11. Diego Restuccia, 2019. "Misallocation and aggregate productivity across time and space," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(1), pages 5-32, February.
    12. Stephie Fried & David Lagakos, 2020. "Electricity and Firm Productivity: A General-Equilibrium Approach," NBER Working Papers 27081, National Bureau of Economic Research, Inc.
    13. Jonathan Temple & Ludger Wößmann, 2006. "Dualism and cross-country growth regressions," Journal of Economic Growth, Springer, vol. 11(3), pages 187-228, September.
    14. Diego Restuccia & Richard Rogerson, 2017. "The Causes and Costs of Misallocation," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 151-174, Summer.
    15. Kaarsen, Nicolai, 2014. "Cross-country differences in the quality of schooling," Journal of Development Economics, Elsevier, vol. 107(C), pages 215-224.
    16. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 585-645, Elsevier.
    17. Charles I. Jones & Paul M. Romer, 2010. "The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 224-245, January.
    18. Chu, Angus C. & Peretto, Pietro F. & Wang, Xilin, 2022. "Agricultural revolution and industrialization," Journal of Development Economics, Elsevier, vol. 158(C).
    19. Francesco Lancia & Giovanni Prarolo, 2012. "A politico-economic model of aging, technology adoption and growth," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(3), pages 989-1018, July.
    20. Osea Giuntella & Lorenzo Rotunno & Luca Stella, 2022. "Globalization, Fertility and Marital Behavior in a Lowest-Low Fertility Setting," CESifo Working Paper Series 9755, CESifo.

    More about this item

    Keywords

    Heterogeneous agents; interest rates; patience; selection;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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
    • N30 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - General, International, or Comparative
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2020-03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Business School Research Team (email available below). General contact details of provider: https://edirc.repec.org/data/dpglauk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.