Low frequency drivers of the real interest rate: Empirical evidence for advanced economies

• Published date: 01 August 2019
• DOI: http://doi.org/10.1111/infi.12336
• Author: Fabio Busetti,Michele Caivano
• Date: 01 August 2019

DOI: 10.1111/infi.12336

ORIGINAL ARTICLE

Low frequency drivers of the real interest rate:

Empirical evidence for advanced economies

†

Fabio Busetti

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Michele Caivano

Bank of Italy, Directorate General for

Economics, Statistics and Research,

Rome, Italy

Correspondence

Fabio Busetti, Bank of Italy, Directorate

General for Economics, Statistics and

Research, Rome, Italy.

Email: fabio.busetti@bancaditalia.it

Abstract

This article presents an empirical analysis of the underlying

drivers of the real interest rate in advanced economies since

1980. We adopt a band spectrum regression approach,

which allows us to study the link between the real interest

rate and its determinants only over low frequencies, leaving

aside business cycle fluctuations and high frequency noise.

Spectral regressions are pooled across countries, allowing

for country fixed effects. Our findings indicate that most of

the long-term movements of real interest rates are explained

by the evolution of total factor productivity (with a specific

role for human capital accumulation) and demographic

trends. Monetary policy and credit developments, instead,

appear to play a limited part. According to our estimates,

over recent years the natural rate of interest has remained

positive in the United States and United Kingdom, but fell

below zero in the euro area and Japan. Finally, the paper

provides an empirical contribution to the debate on secular

stagnation, suggesting that supply-side mechanisms were

one of the most significant factors behind the fall in income

growth in the advanced economies over the last two

decades.

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INTRODUCTION

Real interest rates tend to co-move among advanced countries. Theoretical arguments suggest that their

long-term behaviour is driven by supply-side determinants, such as technology and demographic

†

The views expressed here are those of the authors and not necessarily those of the Bank of Italy.

International Finance. 2018;1–15. wileyonlinelibrary.com/journal/infi © 2018 John Wiley & Sons Ltd

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