The assessment: real interest rates

Abstract

The assessment attempts to provide a broad explanation of the post-war pattern of real interest rates, drawing on the theoretical and empirical papers in this issue of the Oxford Review. It is argued that the concept of the "neutral" rate of interest, at which the economy grows at its productive potential without changes in the inflation rate, provides a helpful framework for understanding these developments. The neutral rate provides a bridge between, on the one hand, the fundamental determinants of real returns, as suggested by models of economic growth and, on the other hand, the functioning of asset markets and the operating procedures of central banks. The change in policy stance towards tighter money at the beginning of the 1980s is seen as having had long-lasting effects, especially when account is taken of the fiscal stance.

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