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