Real Interest Rates, Saving and Investment

This paper investigates the determinants of real interest rates at world and country level. The starting point is the idea that real interest rates re°ect the interaction of desired saving and planned investment, using the framework developed by Barro and Sala-i-Martin (1990) and Barro (1992). The paper updates previous results and extends the analysis to study long real interest rates. We analyse which factors have been responsible for real rate `regime shifts' during 1959 to 1992. We examine the determinants of interest rate di®erentials across ten major industrialised countries and provide estimates of the extent of capital market integration. ¤ I would like to thank Robert Barro, Nigel Jenkinson and other members of Monetary Analysis, Bank of England for comments. Thanks are also due to Robert Barro for providing data. All remaining errors are my own. This paper was largely written while the author was in the Structural Economic Analysis Division of the Bank of England. The views expressed in this paper are those of the author and not necessarily those of the Bank of England.