How Real Rates Shape Long-Term Growth

Beyond cyclical fluctuations, real rates condition the pace of capital accumulation and the quality of investment — two direct determinants of potential growth.

The quantity-quality dilemma in investment, a function of the real-rate regime, sits at the heart of debates over productivity in advanced economies.

Real rates condition capital accumulation and productivity, the determinants of potential growth. The quantity-quality dilemma.

Total factor productivity in advanced economies has decelerated persistently over the past two decades. According to OECD estimates (Compendium of Productivity Indicators, 2025), annual multifactor productivity growth in the OECD area fell from ≈1.2% over 2000–2007 to ≈0.5% over 2010–2019. This inflection coincides precisely with the period of durably low and then negative real rates — a temporal overlap that invites examination of the structural link between the real-rate regime and the long-term growth trajectory. Companion analysis: The Eco3min framework on the transmission of monetary policy to company results.

The Quantity-Quality Dilemma in Investment

A low real-rate regime encourages investment by volume: the hurdle rate required to commit to a project falls, and low-return investments become viable. Capital accumulation appears to accelerate. But the added quantity comes at a cost in quality. Marginal projects financed at zero or negative real cost contribute little to productivity and tie up resources (labor, commodities, land) that could have been allocated to more productive uses.

The BIS has documented this mechanism on long data. In Working Paper 534, published in January 2016, Borio, Kharroubi, Upper and Zampolli examine more than twenty advanced economies over more than forty years and find that credit booms undermine productivity growth by reallocating labour towards lower-productivity sectors, a bloated construction sector being the canonical case. Their evidence runs through credit rather than the real rate directly, but the selection mechanism operating through the real cost of capital, described in the analytical core on real rates, plays a role in the quality of capital accumulation.

The Equilibrium Real Rate: An Unstable Benchmark

The concept of the equilibrium real rate (r*, the rate consistent with full employment without excessive inflation) provides a theoretical benchmark for assessing whether monetary policy is restraining or supporting potential growth. If the observed real rate sits above r*, policy is restrictive and weighs on capital accumulation. If it sits below, policy stimulates accumulation — at the risk of fueling the distortions described above.

The problem is that r* is not directly observable. The Laubach-Williams estimates, published by the New York Fed, which states they are not official Federal Reserve or FOMC forecasts, place US r* between 1.01% and 1.65% in Q2 2026, depending on whether the US-only or the international variant of the model is used. The 0.64 point spread between the two variants is on its own wide enough to make any clear-cut conclusion uncertain. With the 10-year real rate averaging 2.07% over 2026, policy reads as modestly restrictive on the higher variant and markedly more so on the lower one. These factors (demographics, energy transitions, productivity) are precisely the structural drivers behind a higher-rate regime, and they shape the path of r* and, by extension, of potential growth.

What the Current Regime Implies for the Long-Term Trajectory

The return of the 10-year real rate above 2%, its 2007 level, restores a selection mechanism that had faded away. Investments in the energy transition and digitalization, whose expected returns are substantial, continue to attract financing. By contrast, extensive expansions with low value added (office commercial real estate, excess industrial capacity) face the filter of the real cost of capital.

If this reconfiguration continues, it could contribute to a gradual recovery in productivity across advanced economies, though the scenario is not guaranteed. Uncertainty over the level of r*, the timing of adjustments and possible supply shocks limit visibility. This structural setting fits within the long-term monetary framework that shapes resource allocation across advanced economies.

Last updated — 6 October 2026