Real Interest Rate and Growth Rate: Theory and Empirical Evidence

Abstract

This study presents an assessment of the links between the real interest rate and the growth rate. In the first part of the paper we recall the theoretical foundations of these links. In the second part, we compare empirical data with the predictions of the theory. The real interest rate should exceed the growth rate in the long run. This hierarchy has important consequences on the public finances. The Solow-Ramsey-Cass model fits better to the data than the endogenous growth theory. Furthermore, the Sixties and Seventies have been a time of transitory dynamics with real interest rates lower than the growth rates.

Keywords: real interest rate, growth rate, time preference rate, productivity of

JEL Classification: E22, E43, E44, O41