Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2017:6: Why are real interest rates so low? Evidence from a structural VAR with sign restrictions

Annika Alexius ()
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Annika Alexius: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: Numerous explanations for the low World real interest rate have been discussed in the literature, but only a handful of studies attempt to disentangle the relative importance of the different factors. Sign restrictions are useful for analyzing this problem since shocks to the supply of savings can be separated from shocks to investment demand using the fact that these shocks have effects of opposite signs on the equilibrium real interest rate. The bivariate model with only the real interest rate and investment indicates that shocks to investment demand have been twice as important to the recent decline in real interest rates as shocks to savings. When more shocks are included, we find that 1.26 percent of the low real interest rate 2012-2015 is due to negative business cycle shocks and 1.11 percent is due to low productivity. According to these structural VARs with sign restrictions, high savings has not been a major factor behind the recent decline in World real interest rates.

Keywords: Real interest rate; sign restrictions; global savings and investment

JEL-codes: E43; E44

26 pages, October 27, 2017

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