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The Slowdown and Real Interest Rates

In: The Great Economic Slowdown

Author

Listed:
  • Edmund Phelps

    (Columbia University)

  • Hian Teck Hoon

    (Singapore Management University)

  • Gylfi Zoega

    (University of Iceland)

Abstract

The capital market equilibrium is derived wherein the equilibrium real rate of interest equalizes the supply of saving (coming from households) with the demand for capital (coming from firms). The model is then used to show how a fall in the rate of productivity growth lowers the equilibrium interest rate by increasing the supply of saving in the capital market in a one-sector neoclassical model. A fall in the rate of population growth is shown to have the same effect. Public debt is shown to create a wedge between the supply of wealth and the demand for capital, raising real interest rates and crowding out the capital stock.

Suggested Citation

  • Edmund Phelps & Hian Teck Hoon & Gylfi Zoega, 2023. "The Slowdown and Real Interest Rates," Springer Books, in: The Great Economic Slowdown, chapter 2, pages 11-29, Springer.
  • Handle: RePEc:spr:sprchp:978-3-031-31441-4_2
    DOI: 10.1007/978-3-031-31441-4_2
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