Longer-run equilibrium interest rates: evidence from the United Kingdom

Abstract

The natural rate of interest ($r^{\ast }$) has recently been in decline, yet little is known about its historical variation. This paper estimates $r^{\ast }$ over more than three centuries for the United Kingdom, between 1700 and 2019. Results suggest that the longer-run equilibrium interest rate rose persistently during much of the 18th and 19th centuries, and only began to decline around the turn of the 20th. Historical decompositions suggest that structural changes in productivity, demography, and risk are largely responsible for this reduction. I argue that secular stagnation is unique to contemporary history, insofar as $r^{\ast }$ ascended across much of the Late Modern Era.