Discussion Paper Series 2022-E-2

The Return on Private Capital: Rising and Diverging

Robert S. Chirinko, Debdulal Mallick

We study the return on private capital across 88 countries for 1970-2014. The return on private capital has exhibited two phases, approximately constant from 1970-1990, but then rising dramatically from 1991-2014. This latter increase occurs for both Rich/Developed and Poor/Developing countries, though at an uneven pace; the Lucas Paradox seems to have become more pronounced in recent years. Despite falling real interest rates lowering the returns on private capital, 60% of the secular rise in the returns in poor countries is explained by rising equity risk, depreciation, and markups and by the capital loss from expected decreases in the relative price of new capital. These same factors explain 163% of the secular rise in the returns of private capital in rich countries (i.e., the factors rise more than the returns). Policy implications are discussed.

Keywords: Return on private capital; International capital allocations

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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