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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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    1. Socializing investment
      by chris in Stumbling and Mumbling on 2016-10-07 17:49:18

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    1. Rana Sajedi & Gregory Thwaites, 2016. "Why Are Real Interest Rates So Low? The Role of the Relative Price of Investment Goods," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 635-659, November.
    2. Enrico Sergio Levrero, 2021. "Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment," International Journal of Political Economy, Taylor & Francis Journals, vol. 50(1), pages 5-27, February.
    3. Gauti B. Eggertsson & Neil R. Mehrotra & Jacob A. Robbins, 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 1-48, January.
    4. Dilian Vassilev, 2020. "Secular stagnation – the origin of the concept, a review of the scientific literature and the nature of the academic debate," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 137-158.
    5. Darius Kulikauskas, 2015. "Measuring fundamental housing prices in the Baltic States: empirical approach," ERES eres2015_31, European Real Estate Society (ERES).
    6. Guido Baldi & Patrick Harms, 2017. "The Natural Rate of Interest and Secular Stagnation," DIW Roundup: Politik im Fokus 110, DIW Berlin, German Institute for Economic Research.
    7. Mikkel Barslund & Lars Ludolph, 2019. "Could the decrease in Belgian government debt-servicing costs offset increased age-related expenditure?," Public Sector Economics, Institute of Public Finance, vol. 43(3), pages 225-246.
    8. Neri, Stefano & Gerali, Andrea, 2019. "Natural rates across the Atlantic," Journal of Macroeconomics, Elsevier, vol. 62(C).
    9. Robin Döttling & Enrico Perotti, 2015. "Mortgage Finance and Technological Change," Tinbergen Institute Discussion Papers 15-079/IV, Tinbergen Institute.
    10. Alexius, Annika, 2017. "Why are real interest rates so low? Evidence from a structural VAR with sign restrictions," Research Papers in Economics 2017:6, Stockholm University, Department of Economics.
    11. MIYAGAWA Tsutomu & TAKIZAWA Miho & TONOGI Konomi, 2016. "Declining Rate of Return on Capital and the Role of Intangibles in Japan," Discussion papers 16051, Research Institute of Economy, Trade and Industry (RIETI).
    12. Sergio de Ferra, 2017. "External Imbalances, Gross Capital Flows and Sovereign Debt Crises," 2017 Meeting Papers 726, Society for Economic Dynamics.
    13. Harashima, Taiji, 2018. "Why Are Inflation and Real Interest Rates So Low? A Mechanism of Low and Floating Real Interest and Inflation Rates," MPRA Paper 84311, University Library of Munich, Germany.
    14. Spahn, Peter, 2016. "Population growth, saving, interest rates and stagnation: Discussing the Eggertsson-Mehrotra model," Hohenheim Discussion Papers in Business, Economics and Social Sciences 04-2016, University of Hohenheim, Faculty of Business, Economics and Social Sciences.

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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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