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IMF Economic Review

, Volume 64, Issue 4, pp 635–659 | Cite as

Why Are Real Interest Rates So Low? The Role of the Relative Price of Investment Goods

  • Rana Sajedi
  • Gregory Thwaites
Article

Abstract

Across the industrialised world, real interest rates and nominal investment rates have fallen, while house prices and household debt ratios have risen. We present a calibrated OLG model which quantifies how much of these four trends can be explained with a fifth—the widespread fall in the relative price of investment goods. Relative to other explanations for low real interest rates, this trend is important because it can also account for the fall in nominal investment rates. The model can reproduce a small but economically significant part of the observed fall in interest rates and rises in house prices and household debt, and a larger part of the fall in the investment rate.

JEL

E22 E43 E60 E13 

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Copyright information

© International Monetary Fund 2016

Authors and Affiliations

  1. 1.Bank of EnglandLondonUK

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