Uncovering the Relationship Between Real Interest Rates and Economic Growth

Published: 2013
Project ID: UM13-Q1


The connection between LR real interest rates and LR economic growth is an important question that is the subject of further investigation here. The purpose of this project is twofold: first, survey the relevant empirical literature and the theoretical links between real rates of return and economic growth. We will also develop a simple theoretical model that highlights some of the important forces at work. Second, we plan to look at both time series as well cross-sectional evidence for correlations between different measures of real interest rates (and capital-output ratios which are indirectly viewed by macroeconomists as a measure of the real rate) and growth rates. Finally, we plan to estimate Vector Auto Regressions to uncover the relationship between these variables.