Fed paper flags risk of low rates misallocating capital

Federal Reserve
The US Federal Reserve’s eagle

Two economists have outlined a theoretical model in which low rates misallocate capital and worsen secular stagnation, publishing their results in a recent US Federal Reserve working paper.

The work of Andrea Caggese of the Universitat Pompeu Fabra and Ander Pérez-Orive of the Fed describes a mechanism that can account for the downward spiral of interest rates in recent years and the accompanying weakness of economic activity.

The model draws on the distinction between tangible capital, such as

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