interest rates and risk, " speech by gertjan vlieghe at the society of business economists'annual conference, london. vlieghe, g. ( 2021 ). “ 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 sample is truncated in 2015. del negro et al. ( 2019 ), holston et al. ( 2017 ) and hamilton et al. ( 2016 ) document similar patterns in real interest rates around the world. 6. within our central framework for understanding its determinants, r * is the price that equilibrates supply and demand in the capital market. on one side of the market, households accumulate wealth and use capital as a means of storing that wealth. households ’ accumulation of wealth is the result of their desire to smooth lifetime consumption. on the other side of the market, firms require capital to produce. they choose the optimal quantity of capital to use, equalising the marginal costs and marginal returns. see bank

of this decline, two factors – population ageing and a slowdown in productivity growth – play the largest roles in explaining the dynamics of global r *. the productivity growth slowdown across advanced economies has been discussed extensively in existing work. [ 11 ] productivity growth impacts r * through firms ’ optimal level of capital for production, in other words the demand for capital from firms. lower productivity reduces the potential returns on new investment ( the marginal product of capital ) and this reduces firms ’ demand for capital at a given interest rate. in equilibrium this reduction in demand lowers r *. the model simulations suggest that this effect accounts for almost half of the decline in global r * over this period. population ageing has been driven by a decline in population growth rates relative to the high levels seen following the second world war and a marked increase in life expectancy. importantly, however, in the model the impact of ageing comes almost entirely from the rise in longevity, rather than the decline in population growth rates. what this means is that the effect of population ageing on the trend real rate is not a consequence of the so - called ‘ baby boom ’. instead, it reflects the fact that the oldest generations in the population – including older retirees – also tend to be those who have accumulated the most wealth. this naturally occurs as households accumulate wealth over their working life, in order to fund their retirement. this means that a shift in the age distribution towards these cohorts, in other words population ageing, will increase total wealth in the economy. [ 12 ] the equilibrium real interest rate falls to incentivise firms to invest this additional wealth into productive capital. it is important to note that the mechanism is driven by the relative wealth levels of different cohorts within the population. it is true that, on average, retirees have low savings rates, as they run down their wealth to finance their retirement. however, the data show that in practice this effect is typically not very strong, so that the average household appears to broadly maintain their wealth during retirement. this tempers the extent to which the retirement of the baby - boom generation reverses the impact of ageing on the real interest rate. these results imply that the effect of population ageing on global r * has been large, and is expected to persist. while the paths of the underlying drivers are estimated only until 2015, the model - based simulation implies that the equilibrium real interest rate will continue to adjust until the population structure and