Working Paper: CEPR ID: DP12837
Authors: Sweder van Wijnbergen
Abstract: What are the drivers of low real rates? What are the implications of the Zero Lower Bound for economic policy? To discuss these questions, we introduce a full general equilibrium model of the world economy within a simple (2 period) intertemporal structure. The model is simple enough to allow for full analytical solution yet sufficiently complex to allow us to address the impact of anticipated future productivity slow down, aging, structural reform and fiscal policy on real interest rates if markets clear and on aggregate economic activity if they do not (because of the ZLB). We extend both the equilibrium model and the ZLB variant to a more-goods-per-period structure to address (real) exchange rate policy and the macroeconomic impact of trade tariffs, like Trump's current trade war, on global economic activity.
Keywords: equilibrium; real interest rates; aging; real exchange rates; import tariffs; productivity change; the zlb
JEL Codes: E62; F13; F40; F41; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated declines in future productivity growth (O49) | reduction in the equilibrium real interest rate (E43) |
| reduction in the equilibrium real interest rate (E43) | decreased second-period output (E23) |
| decreased second-period output (E23) | lowers overall welfare and expenditure in both periods (H53) |
| structural reforms aimed at improving economic efficiency (E69) | higher equilibrium real interest rates (E43) |
| structural reforms shift the current account schedule downwards (F32) | necessitating a higher real interest rate to restore equilibrium (E43) |
| aging populations (J11) | downward pressure on real interest rates (E43) |
| downward pressure on real interest rates (E43) | anticipated declines in future income (J17) |
| ZLB is binding (E52) | real interest rate cannot adjust adequately to clear markets (E43) |
| real interest rate cannot adjust adequately to clear markets (E43) | Keynesian deficiency of demand (E12) |