Endogenous growth and the real interest rate: Evaluating Korea`s low interest rate regime

Abstract

This paper attempts to evaluate Korea's low interest rate regime of the post-2000 period by estimating the, long-run equilibrium real rates using dynamic macroeconomic models. A unified endogenous growth model incorporating both R&D and human capital is constructed to ascertain the relative importance of various determinants of the real rate. The estimates of the long-run equilibrium rates for the unified model, the Solow model, and the Schumpeterian model are presented. The results show that (1) in all cases, the gap between the actual rate and the equilibrium rate seems to have been widening, and (2) estimates for the long-run equilibrium rates indicate that there has been no significant regime shift that would have justified the low interest rates of the post-2000 period, although the unified model shows that there has been a downward shift in the real rate in the 1990s mainly due to changes in human capital productivity.