Re: ECONOMICS; Interest rate question

Date: Wed May 16 2001 - 14:38:49 MDT

In a message dated 5/16/01 12:16:15 PM, writes:

>John Clark wrote:
>>If it turns out that productivity increases over the next 10 to 20 years
>>than what most of today's bankers and bond traders think it will, what would
>>be the implications for current long term interest rates, should it be
>>or lower than it is? I would think higher but I'd like to hear what some
of the
>>real economists on the list have to say.
>Althought it no longer reflects my opinions about future growth rates,
> offers a simple model adequate for
>Interest rates should equal a preference discount rate plus a factor
>proportional to the growth rate in consumption. If productivity rises
>faster, consumption will rise faster, and so interest should be higher.

That's the supply-side.But isn't there a demand-side effect too? If global
productivity rises more quickly, that should bump up global discount rates
as well. This will result in given marginal investments becoming undesirable
and pushing down the demand curve. That would actually reduce rates.
The net effect would depend on the slopes of the supply and demand curves,
(As well as complicated results on discount rates, since a rich capitalist
no change *his* discount rate due to labor productivity - he makes money
from capital; his labor is negligible. If *all* investment came from such
people then I think effects would be as Robin describes.)

What happens if the market is wrong about
long-term productivity? 30-bonds obviously entail an consensus assumption
that productivity growth will remain decided pedestrian for that period.
Rates don't go up until people realize productivity will continue to increase.

(I'm assuming John's referring to labor productivity. If capital productivity
goes up, that's a direct increase in the value of investments and more
reason to expect a increase in interest rates.)

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