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The curse of persistently low real interest rates

Jan Willem van den End, Marco Hoeberichts, (2018), “The curse of persistently low real interest rates”, VoxEU, 25 Απριλίου

The steady downward trend of real interest rates worldwide over the last 30 years has raised the issue of whether the natural rate – defined by Wicksell (1898) as the marginal productivity of capital – has fallen in tandem. Blanchard et al. (2014) conclude that the factors that led to low real interest rates are unlikely to be reversed, and that the natural rate may remain low as well. Borio and Disyatat (2014) go even further and argue that low interest rates validate themselves, suggesting that the natural rate would fall as a result.

There are several channels through which this causality can run. One channel for which the literature has found increasing evidence is the impact of low real rates on resource allocation, which affects total factor productivity (TFP) growth, one of the key drivers of the natural rate. Barnett et al. (2014) report an inefficient allocation of resources in the low interest rate environment across sectors in the UK, where less efficient firms continued operating. Cette et al. (2016) come to similar conclusions for countries in southern Europe, where TFP growth in the manufacturing sectors has been affected by a decline in the interest rate. For Japan, where low interest rates have been common since the early 1990s, Caballero et al. (2008) find that undercapitalised Japanese banks kept on lending to insolvent borrowers (zombies). This kept less productive firms alive and reduced aggregate TFP growth. Schivardi et al. (2017) also investigate the effects of undercapitalised banks on TFP in Italy and find that it adversely affects aggregate TFP dispersion, but only in the presence of a large fraction of zombie firms.

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