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What happens when a permanent gap is created between the real interest rate and the marginal productivity of capital? The example of the euro zone
In the euro zone, the real long-term interest rate is now much lower than the marginal productivity of capital , whereas these two variables should be equal in the long term . This could be explained by expansionary monetary policy, excess savings or high risk aversion. So what are the possible adjustments? A sharp increase in investment and capital accumulation that pushes down the marginal productivity of capital; Bond sales by investors, who switch to other asset classes, which drives up the real long-term interest rate. But it is not possible for a divergence between the real long-term interest rate and the marginal productivity of capital to persist in the long term.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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