Kenneth Rogoff: prediction

Transcript context

…I’m sure you know the classic Paul Samuelson paper on overlapping generations model. In that paper, the real interest rate is equal to the rate of population growth. There’re other papers where the real interest rate is in broad harmony with the rate of productivity growth. If either of those models are correct, aren’t we okay again? First of all, it’s different. You look, if it’s population growth and productivity alone, then you’re losing tax dollars at the same time you’re paying less interest. But it turns out, those variables don’t work so well over a longer period. I have a paper in the American Economic Review just last August about this. If you look over longer time periods, just because economists think that those should be the dominant variables, it doesn’t turn out to work that well. All this stuff — there’ve been a lot of papers by economists looking at the decline. The real interest rate going down, demographics going down, productivity going down, looks great. If you look at a longer period, there’s no there, there. It just doesn’t stand up. I think there are other factors having to do with liquidity, default risk, changing nature of the production function, globalization. I think there are many variables where assuming there’s going to be some reversion to mean is just a pretty good thing to have in the back of your head. You know, Carmen Reinhart and I have this book, This Time Is Different — very much on the theme of people just looking at five years or ten years and thinking, “Oh, it’s just great. It’s just going to go like this.” I think the real interest rate is an example. I would say the low inflation is another example. My students, for a long time, just didn’t believe there’d ever be inflation again. I would teach it; they would fall asleep. I remember asking a question even to someone who was a research assistant at a big central bank, “Explain this to me about inflation.” She said, “My generation doesn’t ever expect to think about inflation. We don’t have it. Please give examples of this.” So no, I would suspect we will have high real interest rate. And by the way, AI will raise the interest rate. But productivity, too. That’s a case where it goes up with productivity.…

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