Accounting for Medium-run Macro-finance Trends

A large amount of recent (and ongoing) research tries to understand why real interest rates have fallen over the past three decades. We contribute to this literature in three ways. We first document empirically that the large decline in the level of real interest rates has occurred while investment, profitability, and the price-earnings have remained roughly stable. We view these additional moments as important targets for any explanation of interest rates. For instance, an increase in the supply of savings due to an aging population would naturally lead to an increase in investment. We next use a simple endowment economy model to study which explanations can account for the observed moments of asset prices. In a final step, we use a simple business cycle model to show how various factors (such as demographics, lower productivity growth, a larger demand for safe assets, a higher perceived risk premium, or an increase in market power) affect our target moments, outlining a possible identification of the key drivers of the trends.