Technological change and the U.S. real interest rate

Economic theory predicts that the rate of technological growth exerts a positive influence on the real rate of interest. To test this hypothesis, I examine the relationship between the inflation-adjusted yield of the 90-day Treasury-Bill and two measures of innovation: the rate of growth of the stock of patents per worker and R&D spending relative to GDP. As theory predicts, from 1963 to 2008 the rate of interest responds positively to an increase in either measure. The point-estimates imply an elasticity of intertemporal substitution between one and two. The findings suggest that a change in the stance of monetary policy and a wave of innovation both contributed to the rise of real interest rates in the 1980s.