Productivity Growth and Interest Rate Trends: A Long-Run Analysis

Authors

• Dmitriy Stolyarov

Abstract

This paper develops a new measure of after-tax rate of return on aggregate wealth and uses it in estimating the structural relationship between the long-run interest rate and productivity growth rate. The structural approach allows use of parameter estimates in constructing projections for the interest rate on U.S. Treasury securities. Results indicate that the long-run interest rate rises slightly more than one for one with productivity growth rate. The projected real interest rate on 10-year US government bonds is in the 1.5-2.0 percent range under intermediate assumptions on future productivity growth and trends in the world interest rate.

Key Findings

• Long-run interest rate rises slightly more than one for one with productivity growth rate.
• A combination of slowing population growth and lower productivity growth would cause a slowdown in global investment demand. Global interest rate could decline by 100-150 basis points within the next 25 years as a result.
• Long-run projections with intermediate assumptions show the real interest rate on 10-year US government bonds in the 1.5-2.0 percent range.

Citation

Stolyarov, Dmitriy. 2016. "Productivity Growth and Interest Rate Trends: A Long-Run Analysis." Ann Arbor, MI. University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2016-357. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp357.pdf

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Project

• UM16-Q2: Joint analysis of the long-run interest rate, productivity growth, and demographics in the U.S. and the global economy

Paper ID

WP 2016-357

Publication Type

Working Paper

Publication Year

2016