Working Paper: NBER ID: w23127
Authors: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
Abstract: The secular decline in safe interest rates since the early 1980s has been the subject of considerable attention. In this short paper, we argue that it is important to consider the evolution of safe real rates in conjunction with three other first-order macroeconomic stylized facts: the relative constancy of the real return to productive capital, the decline in the labor share, and the decline and subsequent stabilization of the earnings yield. Through the lens of a simple accounting framework, these four facts offer insights into the economic forces that might be at work.
Keywords: interest rates; returns on capital; labor share; risk premia; technical change
JEL Codes: E01; E22; E25; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| decline in safe real interest rates (E43) | increase in risk premia (G19) |
| decline in safe real interest rates (E43) | divergence between returns on safe assets and productive capital (G19) |
| decline in labor share (E25) | increase in rents (R21) |
| decline in labor share (E25) | capital-biased technical change (O33) |
| decline in labor share (E25) | decline in relative price of investment goods (E22) |
| decline in safe real interest rates (E43) | stability of returns to capital (D33) |
| stability of returns to capital (D33) | stabilization of earnings yield (G12) |