Decomposing the drivers of Global R*

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 12 July 2022

Staff Working Paper No. 990

By Ambrogio Cesa-Bianchi, Richard Harrison and Rana Sajedi

We use a structural overlapping-generations model to quantify the effects of five exogenous forces that drive the global trend equilibrium real interest rate, Global R*. We use data for 31 countries to extract the global trend components of the five drivers and to derive an empirical estimate of Global R*, which we use to calibrate the model. We design a recursive simulation method in which beliefs about the future path of the drivers are updated gradually. In our simulation, Global R* rises from the mid-1950s to the mid-1970s, declining steadily thereafter. The decline is driven predominantly by slowing productivity growth and increasing longevity.

Decomposing the drivers of Global R*

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