The major implications of the growing gap between the return on equity (RoE) or on physical capital (ROACE) and risk-free interest rates

In OECD countries, the decline in risk-free long-term interest rates has not led to a fall in companies’ required return on equity (RoE) or in the required return on their physical capital (ROACE). The growing gap between the risk-free interest rate and the return on equity or capital has major implications : The fall in risk-free interest rates is not stimulating corporate investment, because the required return on equity has not fallen. This reduces the effectiveness of expansionary monetary policy; Governments’ borrowing costs have become much lower than companies’ cost of capital, which is an incentive to use public debt more and mix public and private financing, in particular to finance very long-term projects; The fall in interest rates on corporate bonds also should encourage companies to use more leverage to achieve the ir high required return on equity.