Structural change, global R* and the missing-investment puzzle

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 20 October 2022

Staff Working Paper No. 997

By Andrew Bailey, Ambrogio Cesa-Bianchi, Marco Garofalo, Richard Harrison, Nick McLaren, Sophie Piton and Rana Sajedi

The world has undergone substantial structural change over recent decades, with profound implications for the long-run policy landscape. We focus on two key trends. First, the secular decline in risk-free interest rates, suggesting a fall in the long-run global equilibrium interest rate, Global R*. Using a structural model, we find that declining productivity growth and increasing longevity played the largest roles in explaining this fall. The second trend is the recorded weakness in investment, despite an increasing wedge between the return on capital and the risk-free rate. We use industry-level data for the United Kingdom to investigate the potential structural factors behind this ‘missing-investment puzzle’, and find a strong role for intangible capital.

Structural change, global R* and the missing-investment puzzle

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