(UM13-Q1) - Uncovering the Relationship Between Real Interest Rates and Economic Growth
Bruce Hansen and Ananth Seshadri
The connection between LR real interest rates and LR economic growth is an important question that is the subject of further investigation here. The purpose of this project is twofold: first, survey the relevant empirical literature and the theoretical links between real rates of return and economic growth. We will also develop a simple theoretical model that highlights some of the important forces at work. Second, we plan to look at both time series as well cross-sectional evidence for correlations between different measures of real interest rates (and capital-output ratios which are indirectly viewed by macroeconomists as a measure of the real rate) and growth rates. Finally, we plan to estimate Vector Auto Regressions to uncover the relationship between these variables.