See, for example, Gordon (2012) and, for a recent survey, Fernald and Inklaar (2022). 12. The model makes the simplifying assumption that households store their wealth by holding bonds and capital via a financial intermediary, but the same mechanism would operate if households held claims on firms directly (for example, equity). The same mechanism also operates in richer models that include additional stores of wealth such as housing (Lisack et al., 2021). 13. Similar points have been made by Lisack et al. (2021), Vlieghe (2021) and Blanchard (2022). On the other hand, Goodhart and Pradhan (2020) argue that the effects of baby boomers retiring could be powerful enough to raise the equilibrium real interest rate. 14. See Bailey et al. (2022) for details. As for the baseline estimate over the 1985-2015 period, the total l ong-run effect is also subject to substantial uncertainty, and ranges between -4.3 and -1.8 percentage points depending on the simulation assumptions. 15. For example Rachel and Smith (2017) estimate a 0.45 percentage point contribution from inequality on the past decline in Global R*, although their analysis suggest that this factor will not push down any further in the future. For the United States, Auclert and Rognlie (2017) find that increased inequality can account for between 0.45 and 0.85 percentage points decline in the real interest rate. See Auclert and Rognlie (2018), Eggertsson et al. (2019), Mian et al. (2021) and Moll et al. (2021) for further discussion of the various mechanisms through which inequality impacts R*. 16.
“Running out of room: revisiting the 3D perspective on low interest rates," Speech by Gertjan Vlieghe at the London School of Economics. Woodford, M. (2003). “Interest and Prices: Foundations of a Theory of Monetary Policy  ”,  Princeton University Press, Princeton (2003). 1. This speech will use a variety of real interest rate estimates, all of which adjust nominal interest rates for expected inflation. 2. For example, some approaches take a ‘longer-run’ perspective, according to which the equilibrium interest rate is the real rate expected to prevail after the economy has adjusted to any cyclical fluctuations (Laubach and Williams, 2003). Other approaches allow for short-term fluctuations in the equilibrium interest rate, defining it as the real rate that would prevail if prices were flexible (Woodford, 2003). 3. See Bank of England (2018) and Bailey et al. (2022). 4. For example, the analysis in Bank of England (2018) assesses that during the global financial crisis, headwinds to demand (including heightened uncertainty and tighter financial conditions) prompted a large fall in the cyclical component that took many years to dissipate. 5. The focus of this speech is on the longer-term structural trends and what might be driving them, for which longer time series of data are preferred. To enable cross-country comparisons, the real rate data are constructed by adjusting market measures of nominal interest rates for inflation. Consistent with the structural model analysis below, the  Page 21 sample is truncated in 2015. Del Negro et al. (2019), Holston et al. (2017) and Hamilton et al.