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Why are real interest rates so low? Secular stagnation and the relative price of investment goods

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  • Thwaites, Gregory

Abstract

Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. I present an OLG model which explains these four trends with a fifth - the widespread fall in the relative price of investment goods. When capital goods are cheaper, a given quantity of saving buys more of them, but the resulting capital deepening lowers the marginal product of each one. Interest rates fall, reducing the user cost of housing, raise house prices and household debt. Preventing the accumulation of debt leads to a bigger fall in interest rates.

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  • Thwaites, Gregory, 2014. "Why are real interest rates so low? Secular stagnation and the relative price of investment goods," LSE Research Online Documents on Economics 86328, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:86328
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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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