Steady-state Growth

Doron Nissim*

Columbia Business School

August 2021

Abstract

The starting point for estimating firm-specific steady-state growth, which is a critical assumption in
implementing fundamental valuation, is the expected long-term growth rate of the economy in which the
company operates. This study provides evidence that supports using the risk-free long-term interest rate
as the basis for forecasting long-term economy-wide growth. Using the risk-free interest rate and various
economists’ forecasts, the study then develops a composite estimate of long-term GDP growth. It
concludes by discussing potential adjustments to this estimate in deriving firm-specific steady-state
growth rates.

JEL Classification: G12, G17, E43, G30

Keywords: Steady-state growth, long-term growth, growth, terminal value, continuing value, DCF,
valuation, economic forecast, interest rate, real interest rate, expected inflation, GDP forecast, inflation,
GDP

*
604 Uris Hall, 3022 Broadway, New York, NY 10027; phone: (212) 854-4249; dn75@columbia.edu.
Helpful comments were provided by Matthias Breuer, Stephen Penman, and Laura Veldkamp.

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1. Introduction

A key assumption in implementing fundamental valuation is the steady-state growth rate. This

estimate is required when calculating the terminal value using the constant growth formula, which

is the most commonly used approach. 1 It is also used for specifying or evaluating the trend in the

revenue growth forecasts through the terminal period. For example, a steady-state growth rate that

is substantially smaller than the revenue growth rate at the end of the explicit forecasts period may

suggest that the explicit forecasts period should be extended, or that a convergence period be

introduced to allow the revenue growth rate to gradually converge to the steady-state growth rate

(e.g., using a linear trend). This study provides evidence relevant for estimating firm-specific

steady-state growth, and it discusses relevant considerations when deriving this estimate.

The importance of the steady-state growth assumption cannot be overstated; the terminal

value calculation often accounts for most of the estimated value, and the constant growth

calculation is highly sensitive to the growth rate. This is due in part to the decline in long-term

interest rates over the last four decades, which has increased both the overall portion of value

attributable to the terminal value 2 and the sensitivity of the constant growth calculation to the

growth rate. 3

A reasonable starting point for estimating firm-specific steady-state growth is expected

long-term GDP growth. This is due to two reasons. First, because firms deliver the majority of

1
Evidence on the common use of the constant growth formula and the importance of the steady-state growth
assumption is provided by surveys of financial analysts and other valuation professionals, including Allee et al.
(2020), Bancel and Mittoo (2014), Brotherson et al. (2014), Mukhlynina and Nyborg (2020), and Pinto et al. (2019).
2
With lower interest rates, the present value of long-term earnings—which is captured by the terminal value—
accounts for a larger portion of overall value (e.g., Dechow et al. 2021).
3 𝐹𝐹𝐹𝐹𝐹𝐹𝑇𝑇+1
The percentage change in the constant growth calculation ( ) due to a one percentage point change in long-
𝑟𝑟−𝑔𝑔
1
term growth is approximately equal to percentage points, which is decreasing in the interest rate.
𝑟𝑟−𝑔𝑔

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value added in the economy, which in turn is equal to GDP, growth in revenue and earnings over

time should be similar to the GDP growth rate. 4 Indeed, supply-side models (e.g., Diermeier et al.

1984) maintain that in the long-run the growth rate in corporate earnings should be the same as

GDP growth. Practitioners and academics recognize the role of GDP growth expectations in

forecasting firms’ revenue and earnings. For example, using a survey of 172 valuation specialists,

Allee et al. (2020) report that the most highly rated response to the question “how often do you

apply the following assumptions to your forecast after the explicit forecast horizon?” is “future

growth based on economy-wide rate.” Mukhlynina and Nyborg (2020) report that valuation

professionals from the asset management industry most commonly use GDP growth in estimating

firm-specific steady-state growth. Li et al. (2014) show that combining geographic segment sales

disclosures and forecasts of country level GDP generates significant improvement in forecasting

firm level profitability.

Another reason that is often mentioned for using GDP growth in specifying the steady-

state growth assumption is that, on a theoretical level, firm-specific steady-state growth cannot

exceed long-term nominal GDP growth; if it does, then at some future point the company will

become bigger than the economy. In fact, in steady state most firms are likely to grow at rates

lower than the economy because new entrants contribute to economic growth. 5 Of course, models

are merely approximations of reality, so the fact that firm-specific growth cannot indefinitely

exceed economy-wide growth does not necessarily imply that specifying a growth rate larger than

the economy-wide growth rate is always “wrong;” in some cases (e.g., small companies with high

4
The value added by firms is approximately equal to the total of pretax earnings, interest expense, and wages; that
is, a metric between revenue and bottom line earnings.
5
Companies may be able to indefinitely grow their revenue at a rate equal to that of the economy, but this would
likely require costly M&A, which would reduce free cash flow growth. When valuing firms, most analysts focus on
existing businesses; that is, they exclude future M&A, effectively assuming that future acquisitions are zero NPV
investments. I elaborate on this issue in Section 5.

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expected growth and high discount rate), doing so may actually improve valuation accuracy. Still,

in most cases one should view economy-wide growth as an upper bound for the steady-state growth

assumption.

There are two approaches for estimating long-term (LT) nominal GDP growth: based on

economists’ real growth and inflation forecasts, and using the LT risk-free interest rate. The

interest rate approach is based on the rationale that interest rates and nominal growth share one

determinant—expected inflation—and their other primary determinant—real interest and real

growth, respectively—are correlated. 6 Specifically, classic economic theory (e.g., Leduc and

Rudebusch 2014, Fischer 2016) postulates that real interest rates inform on future real growth

because they are affected by expectations regarding future growth.

To test the interest rate approach for forecasting growth, the study examines the

relationship between nominal LT interest rates and subsequent annualized LT nominal GDP

growth in the U.S. over the period starting in Q2:1953, with GDP growth measured through

Q1:2021. The estimated relationship is positive and statistically significant, and the levels of and

trends in interest rates and subsequent growth are similar. Using panel data regressions (across

countries and over quarters), the study also shows that annualized LT nominal GDP growth is

strongly related to nominal LT risk-free interest rates at the beginning of the growth period, with

a slope coefficient (intercept) close to one (zero).

The study then explores the predictive ability of the two primary components of interest

rates—expected inflation and the real interest rate—for realized inflation and real GDP growth,

respectively. During the 80s and 90s, measures of expected LT inflation performed well in

6
Interest rates may reflect an inflation risk premium in addition to expected inflation and real rates (e.g., Ang et al.
2008). To the extent that the inflation risk premium accounts for a significant portion of the level of or variability in
nominal long-term interest rates, these rates may fail to predict growth in nominal GDP. However, the results of this
study indicate that nominal interest rates predict nominal GDP growth.

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predicting realized LT inflation. However, the predictability vanished in the last two decades after

inflation stabilized. These results are robust to using alternative measures of expected LT inflation

(surveys of consumers and professional forecasters, FOMC projection, and an estimate derived

from the relationship between the yields on Treasuries and TIPs). In contrast, the real rate of

interest performed well in predicting real GDP growth during the last three decades but not in the

80s. In addition, the real interest rate was significantly correlated with survey-based forecasts of

real growth.

I next use the measures of expected LT inflation mentioned above and measures of

expected LT real growth (survey of professional forecasters, FOMC projection, and the LT real

interest rate) to derive composite forecasts of the LT real and nominal GDP growth rates.

Interestingly, these forecasts do not outperform the LT real and nominal interest rates in predicting

real and nominal GDP growth, respectively. Thus, the overall evidence supports the use of the

interest rate approach for forecasting long-term economic growth. However, the large declines in

LT interest rates due to government interventions (especially quantitative easing or QE) since the

financial crisis have likely distorted the relationship between interest rates and expected growth.

Therefore, considering both the real interest rate and economists’ forecasts when predicting real

growth (for example, using the mean across the real interest rate and the forecasts), instead of

relying solely on the real interest rate, is probably the preferred approach. Alternatively, or in

addition, one may adjust the LT interest rate to “undo” the estimated effects of QE (e.g.,

Krishnamurthy and Vissing-Jorgensen 2011, Wright 2012) or of other factors unrelated to

expected LT GDP growth (e.g., Kozlowski et al. 2019).

As noted above, forecasts of LT GDP growth provide the basis for estimating firm-specific

steady-state growth. However, in many cases these estimates should be adjusted. For companies

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with significant international operations, the relevant economy is a mixture of local and global, so

expected growth rates of foreign economies should also be considered. For truly global companies,

the relevant economy is the world economy. Yet, for many small companies as well as for most

companies operating in highly regulated industries (e.g., utilities, financial institutions), the

relevant economy is local. In addition, for reasons explained in Section 5, steady-state growth is

likely to be relatively low for high payout firms and for very large firms, as well as for companies

operating in declining industries. In such cases, firm-specific steady-state growth can be estimated

by subtracting X% from forecasted LT nominal GDP growth, where X% reflects the extent to

which the company or its existing businesses are expected to decline relative to the overall

economy.

The study proceeds as follows. Section 2 describes the two methods for estimating LT

nominal GDP growth—based on LT interest rates or using economists’ forecasts. Section 3

examines the relationship between LT risk-free interest rates and subsequent LT nominal GDP

growth. Section 4 evaluates the predictive ability of the two primary components of the interest

rate—expected inflation and the real rate—for realized inflation and growth, respectively. Section

5 discusses the relationship between firm-specific steady-state growth and economy-wide growth.

Section 6 concludes.

2. Methods for estimating long-term nominal GDP growth

Long-term (LT) nominal GDP growth can be estimated using economists’ real growth and

inflation forecasts, or based on the LT risk-free interest rate. I describe these methods in turn.

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2.1 Economists’ forecasts

This approach for estimating the LT nominal GDP growth rate (LT_NGDP_G) is straightforward:

economists provide forecasts of inflation and real GDP growth for several years out (e.g., available

through FactSet or Bloomberg, or from the FOMC 7 or the OECD 8) as well as longer-term forecasts

(e.g., OECD, 9 FOMC, 10 Survey of Professional Forecasters, 11 Congressional Budget Office12).

LT_NGDP_G can be estimated using the inflation and real GDP growth forecasts for the most

distant future year for which forecasts are available (INF and GDP_G, respectively) as follows:

(1 + 𝐺𝐺𝐺𝐺𝐺𝐺_𝐺𝐺) × (1 + 𝐼𝐼𝐼𝐼𝐼𝐼) − 1.

In countries where inflation-indexed bonds are traded, long-term inflation forecasts can

also be derived from market prices. For example, in the U.S. the Federal Reserve publishes

estimates of expected inflation over the five years period that begins five years from today, derived

by comparing the yields on nominal and inflation-indexed 5- and 10-years Treasury securities. 13

This estimate is timely (updated daily), and it is based on market information. However, the lower

liquidity of TIPs compared to nominal Treasury bonds, as well as other factors (e.g., inflation risk

premiums, CPI seasonality, the embedded deflation floor in TIPS, flight-to-safety demand for

7
FOMC inflation and real growth forecasts are available at https://fred.stlouisfed.org/data/PCECTPICTM.txt and
https://fred.stlouisfed.org/data/gdpc1rm.txt, respectively. See Appendix A.
8
The OECD publishes 2-3 years out inflation forecasts for OECD countries and other economies
(https://data.oecd.org/price/inflation-forecast.htm). See Appendix A.
9
The OECD publishes long-term real growth forecasts for OECD countries and other economies
(https://data.oecd.org/gdp/real-gdp-long-term-forecast.htm#indicator-chart). See Appendix A.
10
https://fred.stlouisfed.org/data/PCECTPICTMLR.txt and https://fred.stlouisfed.org/data/GDPC1CTMLR.txt. See
Appendix A.
11
CPI10 and RGDP10 (https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-
forecasters). See Appendix A.
12
https://fred.stlouisfed.org/data/gdppot.txt
13
“5-Year, 5-Year Forward Inflation Expectation Rate;” available at https://fred.stlouisfed.org/data/T5YIFR.txt.

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nominal Treasury securities, and Federal Reserve purchases of TIPS), introduce substantial

measurement error into this inflation expectations proxy (e.g., d’Amico et al. 2018).

There are also issues with using economists’ forecasts of inflation and real GDP growth.

These forecasts may be biased or stale (especially long-term forecasts), and in many cases they are

only available for the near-term (especially expected inflation). Near- and even intermediate-term

forecasts are likely to be affected by the current stage in the business cycle, and they may fail to

reflect expected LT growth (especially for developing economies).

2.2 Interest rate approach

Under the interest rate approach, LT nominal GDP growth (LT_NGDP_G) is forecasted based on

the LT risk-free interest rate (LTRf). The rationale for this approach is as follows. The LT risk-free

interest rate is approximately equal to expected inflation plus the real interest rate (ignoring any

inflation risk premium for now). For reasons explained below, the real interest rate is affected by—

and therefore reflects—expectations about economy-wide growth. Thus, LTRf and LT_NGDP_G

share one component—expected inflation—and their other primary components—real interest rate

and real economic growth, respectively—are correlated. Accordingly, LT_NGDP_G can be

forecasted using LTRf, possibly subject to some adjustments.

In standard economic theory, expected economic growth affects real interest rates via two

channels: demand for investment funds, and supply of saving funds (e.g., Leduc and Rudebusch

2014, Fischer 2016). According to the theory, an increase in expected growth (for example, due to

demographic changes such as an increase in working age population) increases forecasted returns

on investment and thus leads to higher investment demand. Because output growth is generally

equal to income growth, the increase in expected output (and income) leads forward-looking

households to save less. In other words, an increase in expected growth increases the demand for

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funds and reduces the supply of funds, both causing an increase in real interest rates. Similarly, a

decrease in expected growth leads to lower real interest rates. Thus, the theory suggests that the

real interest rate is affected by—and therefore reflects—expectations about economic growth.

Still, real interest rates may be different from expected real growth for several reasons.

First, while the directional effects of the theory are clear, changes in expected growth do not

necessarily imply changes in interest rates of the same magnitude. Second, in an open economy

with international financial flows, real interest rates are determined by the interaction of growth,

saving, and investment at the global level rather than by developments in any single country (e.g.,

Barsky and Easton 2021). Third, additional factors may affect the relationship between expected

growth and real interest rates. In particular, government interventions in the form of quantitative

easing (QE) since the financial crisis and more recently in response to COVID-19 have likely

lowered real interest rates significantly below expected LT economic growth. Furthermore,

nominal interest rates include an inflation risk premium in addition to expected inflation and real

rates (e.g., Ang et al. 2008); the level of and variation in this risk premium may weaken the

relationship between nominal interest rates and nominal growth. 14

This study focuses on evaluating the accuracy of the interest rate approach for forecasting

LT GDP growth. Before turning to the empirical analysis, however, it is important to recognize

other advantages of using this method in the context of estimating firm-specific steady-state

growth. Specifically, measuring firm-specific steady-state growth (𝑔𝑔) using the LT risk-free

interest rate (LTRf), which is also used in measuring WACC, guarantees that:

14
The inflation risk premium can be positive or negative; its sign depends on the correlation between inflation and
consumption, with a positive (negative) correlation implying that the nominal rate includes a negative (positive) risk
premium. In most periods the correlation between inflation and consumption is likely to be positive.

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(1) The same expected inflation assumption is used both in predicting and discounting steady-state

cash flows. This is an important advantage especially because a common mistake in valuing

companies with foreign operations is to forecast growth in cash flows considering expected

inflation in the foreign countries while discounting the cash flows using a discount rate that

reflects expected inflation in the domestic country (e.g., company level WACC). 15

(2) The denominator in the constant growth terminal value calculation (𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊 − 𝑔𝑔) is not too

small, reducing the likelihood of overstated terminal value. This follows because WACC is

essentially equal to LTRf plus a risk premium, so setting 𝑔𝑔 equal to LTRf implies that [WACC

– 𝑔𝑔] is equal to the risk premium, which should be at least a few percentage points for

essentially all companies.

And, as noted above, unlike economists’ forecasts of inflation and real growth, which may be

biased or stale, and are often only available for the near- to intermediate-term, LTRf provides a

market-based, timely forecast of long-term expected inflation and real growth.

3. The long-term risk-free interest rate as a proxy for long-term nominal GDP growth

In this section, I examine the relationship between LT interest rates and subsequent realized

nominal GDP growth. To conduct the test, I obtain LT Government yields for the U.S. and many

other countries from the Federal Reserve’s Fred database, FactSet, and the OECD (see Appendix

15
Considering expected inflation in foreign operations when forecasting cash flows is appropriate if one uses
forward or expected future exchange rates (rather than the spot rate) in translating the cash flows of foreign
operations into the domestic currency. Under the relative purchasing power theory, changes in exchange rates should
offset differences in inflation between the foreign and domestic markets. Thus, using the same expected inflation
assumption in measuring steady-state growth and the discount rate (typically WACC) is consistent with assuming
that relative purchasing power parity holds in the long run.

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A). I also obtain government credit default swap (CDS) spreads from Markit (to measure risk-free

interest rates), 16 and realized GDP and inflation data from Fred and the OECD.

Although commonly used in practice as proxies for risk-free interest rates, government

yields overstate risk-free returns for two related reasons. First, the yield to maturity of any bond—

including government bonds—overstates the expected return because it is calculated using the

contractual rather than expected cash flows. While for some governments the probability of default

is very low (e.g., U.S., Germany), implying that expected cash flows are only slightly lower than

contractual cash flows, for others it is quite significant. Moreover, because government default is

more likely in “bad” states of nature, government yields include a risk premium in addition to the

bias that results from using contractual instead of expected cash flows in calculating the yields.

Thus, to measure the truly risk-free interest rate one has to remove both the bias and risk premium

components from government yields. Fortunately, CDS spreads on government bonds provide

market-based proxies for the total of the two components (bias and premium), enabling one to

16
CDS is a credit derivative transaction in which two parties enter into an agreement, whereby one party (the
protection buyer) pays the other party (the protection seller) periodic payments for the specified life of the
agreement. The Protection Seller makes no payment unless a credit event relating to a predetermined reference asset
occurs. If such an event occurs, it triggers the protection seller’s settlement obligation, which can be either cash or
physical. CDS spread in a T year CDS contract is the amount paid by the protection buyer to the protection seller,
measured in annualized percentage points.
CDS contracts are distinguished along several dimensions, including maturity, seniority of the reference
instruments, and type of credit events that trigger the default swap contract. I restrict the CDS data to Senior
Unsecured Debt (tier = SNRFOR), which is by far the most common seniority (more than 99% of the observations
for sovereigns). As described below, there are four types of credit events (Docclause) that trigger settlement under
the CDS contract. Because each of the four clauses is common, I measure the CDS spreads using their median value
across the four credit events each day. The four clauses are: Full Restructuring (CR, about 60% of the observations
for sovereigns): This allows the Protection Buyer to deliver bonds of any maturity after restructuring of debt in any
form occurs. This type of clause is more prevalent in Asia. Modified Restructuring (MR, about 15% of the
observations for sovereigns): limits deliverable obligations to bonds with maturities of less than 30 months after a
credit event. Modified Modified Restructuring (MM, about 20% of the observations for sovereigns): This is a
“modified” version of the Modified Restructuring clause whereby deliverable obligations can mature up to 60
months (5 years) following the credit event. This type of clause if more prevalent in Europe. No Restructuring (XR,
about 5% of the observations for sovereigns): This option excludes restructuring altogether from the CDS contract,
eliminating the possibility that the Protection Seller suffers a “soft” Credit Event that does not necessarily result in
losses to the Protection Buyer. No-R protection typically trades cheaper than Mod-R protection. Following the
implementation of SNAC, this clause is mainly traded in North America.

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estimate risk-free interest rates by removing the CDS spread from the bond yield (i.e., Rf = (1 +

Yield) / (1 + CDS) - 1).

CDS spreads are available from Markit for many countries, but the coverage is relatively

recent (no earlier than March 2002, and a later date for most economies), which effectively

eliminates the ability to examine the relationship between LT risk-free interest rates and

subsequent realized nominal GDP growth over time (given the requirement of several subsequent

years over which realized GDP growth is measured). Still, a meaningful time-series analysis can

be conducted for the U.S.; although not risk free, U.S. Treasury yields include a relatively small

credit spread, and they can therefore serve as proxies for risk-free interest rates. The next

subsection (3.1) conducts a time-series analysis using U.S. data, followed by a panel data analysis

using international data (subsection 3.2).

3.1 U.S. evidence

To effectively reflect expectations of LT inflation and LT real growth, the interest rate proxy

should exclude the impact of abnormal expected near-term inflation and growth. The ten-year

Government yield, which is often used as a proxy for LT interest rates, varies significantly over

the business cycle. In contrast, the five-year forward five-year Treasury rate is much less sensitive

to such fluctuations, and—as shown in Figure 1—has been essentially identical to the 30-year

Treasury rate in the U.S. throughout the last 43 years. I therefore use the forward rate as a proxy

for the U.S. LT interest rate. (I do not use the 30-year Treasury rate because it is available only

since 1977; however, using the 30-year rate when available has no effect on the results.)

Figure 2 plots the LT interest rate at the end of each calendar quarter, along with the

annualized nominal GDP growth over the next five and ten years. The figure suggests that the LT

11

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interest rate is a reasonably accurate forecast of LT GDP growth, as the levels of and trends in the

interest rate and subsequent annualized growth variables are similar for most of the sample period.

Table 1 reports results from time-series regressions of the two measures of annualized

nominal GDP growth—over ten and five years—on the LT interest rate at the beginning of the

growth period. The first two regressions use the full sample period, while the other three use three

equal length subperiod, focusing on the 10-year annualized growth. As shown, in each of the two

full-sample regressions the slope coefficient is positive and significant. However, the slope

coefficients are significantly smaller than one, and the intercepts are significantly different from

zero. The subperiod results show a strong relationship during the first and third periods (slope

coefficient close to one and highly significant), but a negative coefficient for the middle period.

Figure 2 suggests that the negative association during the middle period is due to the large increases

in interest rates in the late 70s, which were followed by declining nominal growth rates. Evidence

provided below suggests that the decline in nominal growth in the 80s was partially due to an

unexpected decline in inflation. In other words, the performance of the LT interest rate in

explaining expected growth was probably better than its correlation with realized growth. In

addition, as will be shown, the real interest rate was positively related to forecasts of real growth

during that period.

3.2 International evidence

Table 2 presents the results of unbalanced panel data regressions (across 37 countries and over the

period Q1:2002-Q1:2021) of two measures of annualized nominal GDP growth—over ten and five

years—on the nominal LT risk-free interest rate at the beginning of the growth period. The LT

risk-free interest rate is measured using the longest available government yield and CDS spread

(30, 25, 20, 15 or 10 years). In each of the two regressions the slope coefficient is positive and

12

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highly significant. In addition, for the long horizon regression (annualized growth over ten years),

the slope coefficient is not significantly different from one, the intercept is not significantly

different from zero, and the regression R-squared is particularly high. Figure 3 plots the

observations used in this regression along with the 450 line (i.e., using the LT risk-free interest rate

to forecast LT growth). Given that unexpected inflation and unexpected real growth were probably

quite significant for at least some observations (e.g., the severity of the financial crisis was not

expected in the preceding years), model fit is quite remarkable. LT risk-free interest rates may not

be perfect proxies for expected LT economic growth, but they clearly provide useful information

about it.

4. The predictive ability of components of the long-term interest rate

The evidence provided in the previous section indicates that the LT risk-free interest rate predicts

nominal GDP growth, both in the U.S. and internationally. Is this predictive ability due to expected

inflation or to the real rate? The next two subsections investigate.

4.1 Expected inflation and subsequent realized inflation

Examining the relationship between realized and expected LT inflation requires estimates of the

latter. In the U.S., forecasts of LT inflation are available from surveys of consumers (University

of Michigan) and professional forecasters (Federal Reserve Bank of Philadelphia) as well as from

the FOMC. LT inflation forecasts can also be derived from market prices of nominal and inflation-

indexed bonds (10 year and 5-5 years measures, see Section 2.1 and Appendix B). As discussed in

Appendix A, these forecasts differ in the coverage period. For the time-series analysis I use five

measures of expected LT inflation, obtained from the above-mentioned sources.

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 Figures 4 and 5 present the time series of the five measures of expected inflation as well as

of realized inflation over the subsequent five and ten years. Figure 4, which starts in the mid-70,

shows a strong correlation between the measure of expected inflation with the longest coverage

period (survey of consumers) and the two measures of realized subsequent inflation. There is also

some evidence of a positive relationship between the two survey measures (of consumers and

professional forecasters). However, due to the stabilization of inflation and inflation expectations

since the early 90s, correlations among the other measures are difficult to discern, not even when

adjusting the scale of the y-axis (Figure 5).

Table 3 presents correlation coefficients among the inflation variables, using alternative

sets of observations to maintain comparability across the correlation coefficients. Specifically,

each correlation matrix uses observations with non-missing values for each of the expected

inflation measures used in that matrix. As shown, the measures of expected inflation are highly

correlated with each other except the FOMC measure, which has the shortest coverage period. In

contrast, the correlations between each of the five measures of expected inflation and each of the

two measures of realized inflation are generally insignificant, except in the first correlation matrix,

which includes the early period during which inflation declined monotonically (late 70s and 80s).

Overall, the evidence suggests that the alternative measures of expected inflation capture market

expectations, but inflation appears to be unpredictable, at least over the last three decades.

I next use the mean of the five measures of expected inflation (calculated as long as at least

one of them is non-missing) to aggregate their information, and I plot it over time along with the

two measures of subsequent realized inflation in Figure 6. As shown, the trends in expected and

realized inflation are similar, but realized inflation is consistently a bit lower than expected. Table

4 reports results from time-series regressions of the two measures of realized inflation on the

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composite measure of expected inflation. The relationships are highly significant when using the

full sample period but not when focusing on recent years.

4.2 The real long-term interest rate as a predictor of real GDP growth

To investigate the relationship between LT real interest rates and expected and realized real GDP

growth, I use the composite measure of expected inflation described above to estimate the real

interest rate (i.e., real interest rate = (1 + nominal interest rate) / (1 + expected inflation) - 1). I

also obtain two alternative forecasts of LT real GDP growth—from the survey of professional

forecasters and the FOMC projections (see Appendixes A and B). Figure 7 plots the time-series of

the real interest rate along with the two measures of expected LT real GDP growth and realized

real growth over the subsequent five and ten years. The plots suggest that there is a positive

correlation between the real interest rate and both the forecasts and subsequent real growth, but

the relationship between the forecasts and realized growth is less clear. Table 5, which reports

correlation coefficients among these variables, confirms the patterns observed in Figure 7—the

real interest rate is positively related to subsequent growth, but the two forecasts are either

negatively or insignificantly related to subsequent growth. Still, the real interest rate is positively

and significantly related to the two forecasts, further supporting the hypothesis that real interest

rates inform about expected growth. Table 6 shows that the relationship between real interest rates

and subsequent growth was strong over the last three decades but not during the preceding period.

Similar to the derivation of the composite measure of expected inflation, I next calculate

the mean across the real interest rate and the two LT GDP growth forecasts and use it as a proxy

for LT GDP growth. I also calculate a nominal GDP growth forecast using the composite forecasts

of real growth and expected inflation. Tables 7 and 8, and Figures 8 and 9, evaluate the predictive

ability of the forecasts of real and nominal growth, respectively. Comparing the estimates in Tables

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7 and 8 to the corresponding results when using just the real and nominal interest rates to predict

real and nominal growth (Tables 6 and 1 respectively) suggests that interest rates outperform the

composite forecasts. In all cases, the R-squared are lower when using the forecasts instead of the

interest rates. However, the large government-triggered declines in LT interest rates (QE) since

the financial crisis and more recently in response to COVID-19 have likely distorted the

relationship between interest rates and expected growth. Therefore, using the composite

forecasts—or more generally considering economists’ forecasts in addition to LT interest rates

instead of relying on interest rates solely—is probably the preferred approach for forecasting

growth going forward.

I conclude this section by providing some evidence on the likely impact of QE around the

world on the relationship between interest rates and expected growth. Figure 10 presents forecasts

of LT nominal GDP growth and the risk-free interest rate across countries for which the

information required to measure these variables is available from Markit (CDS spread) and either

FactSet or the OECD (interest rates, expected inflation and real GDP growth) as of May 2021. The

LT risk-free interest rate is measured using the longest available government yield and CDS spread

(30, 25, 20, 15 or 10 years). The nominal GDP growth forecast is calculated as follows:

(1 + 𝐺𝐺𝐺𝐺𝐺𝐺_𝐺𝐺) × (1 + 𝐼𝐼𝐼𝐼𝐼𝐼) − 1, where INF and GDP_G were obtained from FactSet or the

OECD (see Appendix A). As is evident from the figure, there is a strong correlation between the

two measures; indeed, the Pearson (Spearman) correlation coefficient is 0.71 (0.64), and both

coefficients are highly significant. However, for almost all countries, economists’ forecast of

nominal growth is substantially higher than the risk-free rate, with a mean value of 4.3% compared

to 1.3% for the interest rate. It is likely that at least some of this difference is due to the impact of

QE on long-term interest rates.

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5. Company-specific steady-state growth forecast

As of May 2021, the composite estimate of LT nominal GDP growth for the U.S. (derived as

described in Section 4.2) was 3.8%, somewhat below the average 10-years annualized nominal

GDP growth over the last 30 years (4.3%). Thus, if one uses the LT nominal GDP growth rate to

measure firm-specific steady-state growth rates, it appears that the estimate should be about 4%.

In contrast, sales growth rates of U.S. public companies have historically been substantially higher

than 4% (e.g., Chan et al. 2003), suggesting that the steady-state growth assumption should be set

above the LT GDP growth estimate. However, historical sales growth rates of public companies

overstate expected steady-state growth for several reasons, as explained next.

First, many companies haven’t yet reached steady-state and are growing at relatively high

rates. Second, currently existing public companies on average experienced greater success than

expected in the past (the probability of failure or delisting was greater than zero). Third, while

inflation in the last three decades has been relatively stable, studies that report high sales growth

rates often include earlier years during which inflation was significantly higher. Finally, historical

growth rates of public companies are in part due to M&A activities. When conducting DCF

valuation, analysts typically do not attempt to predict free cash flows from future M&A due to the

high uncertainty associated with such activities. They instead focus on valuing existing businesses

and assume that any future M&A activity will have no effect on value (i.e., the amounts paid in

M&A transactions will equal the value of the acquired businesses). If they expect substantial value

creation or destruction in future M&A, most analysts account for it separately from the present

value of free cash flows (e.g., by adding a premium to the estimated value of existing businesses).

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 Thus, the relatively high historical growth rates of public companies do not imply that

steady-state growth should be set above estimates of economy-wide growth. In fact, because

economy-wide growth is due in part to the contribution of new firms, the steady-state growth

assumption should generally be set below LT GDP growth, especially for high payout or large size

firms. I elaborate in the next two subsections.

5.1 Steady-state growth and payout

Revenue growth requires either making additional investments in operating assets (e.g., PP&E,

inventory, etc.) or improving asset utilization. The former requires obtaining additional funds,

either from earnings reinvestment or external sources. In steady state, asset utilization and the

leverage ratio are not expected to change, so revenue growth is proportional to equity growth. That

is, in steady state revenue growth is equal to the so-called sustainable growth rate, which is defined

as the product of steady-state ROE (= earnings / book value) and steady-state plowback (reinvested

earnings / earnings, or 1 - payout ratio). 17 Thus, steady-state growth can be measured using

estimates of steady-state ROE and payout. While theoretically appealing, this approach for

estimating steady-state growth is typically impractical, due primarily to difficulties in predicting

steady-state payout. 18 Perhaps the one industry where this approach can be properly implemented

is the REIT industry—U.S. REITs are required to pay out 90% of their taxable income, and other

countries have similar requirements. Thus, for REITs, and for other companies with expected high

steady-state payout (e.g., utilities, banks), steady-state growth should be set significantly below

economy-wide growth.

17
Reinvested earnings are earnings minus net payments to shareholders (dividends plus share repurchases minus
share issuance).
18
Another important limitation of using the sustainable growth rate to forecast growth, which is especially relevant
in today’s intangible-intensive economy, is that organic investments in intangibles are expensed immediately. Thus,
a company that increases its investments in R&D, advertising, human capital, etc., will have depressed earnings, but
its revenue and earnings are likely to grow even if it pays out all reported (understated) earnings as dividends.

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5.2 Steady-state growth and firm size

As noted earlier, steady-state growth should generally be lower than expected LT GDP growth

because economy-wide growth is partially due to the contribution of new firms. This is especially

true for large companies, as their ability to reach new customers, improve efficiency, innovate, or

adjust to changing conditions is typically lower than that of smaller firms (e.g., Coad et al. 2016).

Indeed, the relative size of dominant firms within an industry tends to decline over time. In

contrast, smaller firms are often expected to grow at above normal rates for many years. Indeed,

firm size is empirically negatively related to subsequent LT growth (e.g., Chan et el. 2003).

Therefore, the difference between LT GDP growth and steady-state growth should generally

increase with firm size.

Because small, high-risk firms are often expected to grow at relatively high rates for many

years, estimating their value requires a long period of explicit forecasts until steady state. Due to

difficulties in forecasting the long-term performance of such companies, analysts often specify a

small number of explicit forecasts years and use a steady-state growth rate larger than the LT GDP

growth rate. While theoretically problematic, under some conditions this approach may result in a

reasonable approximation. If the firm-specific risk premium is high (which may be the case for

small growth firms), the high discount rate substantially reduces the present value of free cash

flows to be received in very far years, effectively rendering them irrelevant. Thus, the resulting

valuation is equivalent to one obtained by setting the growth rate in distant future years equal to

or below the economy growth rate.

Still, assuming steady-state growth in excess of LT GDP growth is not recommended. First,

although small firms are relatively risky, over time their riskiness converges toward the mean (e.g.,

Keloharju et al. 2019). Second, given the currently low LT interest rates, the discount rate may not

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be high enough to make the present value of long-term cash flows negligible even if one assumes

a high risk premium. There is an alternative, preferred approach. If the company is not likely to

reach steady state by the end of the period for which explicit forecasts can be reasonably made,

one may specify a convergence period during which key ratios are expected to converge to their

steady-state values (e.g., using linear trends), and then derive free cash flow forecasts using the

interpolated ratios.

6. Conclusion

The starting point for estimating firm-specific steady-state growth, which is a critical assumption

in implementing fundamental valuation, is the expected LT growth rate of the economy in which

the company operates. This study provides evidence relevant for estimating LT economy-wide

growth, and it describes relevant considerations when deriving the firm-specific steady-state

growth estimate from the LT GDP growth forecast.

LT GDP growth can be estimated using economists’ forecasts or based on the LT risk-free

interest rate. This study provides evidence that supports using the interest rate approach;

specifically, it documents a strong positive relationship between interest rates and subsequent GDP

growth using time-series analysis for the U.S. and panel data analysis with 37 countries. The study

also shows that this relationship is due to both the expected inflation component of nominal interest

rates predicting realized GDP inflation, and the real interest rate predicting real GDP growth.

Moreover, the real interest rate is strongly correlated with economists’ forecasts of LT real GDP

growth, and the interest rate approach outperforms economists’ forecasts in predicting LT GDP

growth.

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 Thus, the overall evidence supports the use of the interest rate approach for forecasting

long-term economic growth. However, the large government-triggered declines in LT interest rates

(QE) since the financial crisis and more recently in response to COVID-19 have likely distorted

the relationship between interest rates and expected growth. Therefore, considering the real interest

rate when forecasting real growth (in addition to economists’ forecasts) instead of relying on it

solely is probably the preferred approach for estimating LT GDP growth going forward.

Alternatively, or in addition, the measurement error in LT interest rates when used to forecast LT

growth can be mitigated by adjusting the rates for the estimated effects of demand and supply

shocks unrelated to expected long-term growth such as QE or changes in the assessment or pricing

of risk (e.g., Krishnamurthy and Vissing-Jorgensen 2011, Kozlowski et al. 2019).

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 Appendix A: Data sources

A.1 FactSet
[Obtained on May 12, 2021]

Inflation and growth forecasts: different countries

Current data; used in Figure 10.
Inflation forecast and real GDP growth forecast are measured using the most distant forecasts
available from FactSet (typically three years out).

Interest rates: different countries

Historical data, through Q1:2021 (start date varies by country); used in Table 2 and Figure 3.
The long-term government yield is measured as the first available value in the following series:
the 30 year government yield, the 25 year government yield, the 20 year government yield, the
15 year government yield, or the 10 year government yield.

A.2 OECD
[Obtained on May 12, 2021]

CPI Inflation: different countries

Historical data, through Q1:2021 (start date varies by country); used in Table 2 and Figure 3.
https://data.oecd.org/price/inflation-cpi.htm (Total, IDX2015, monthly)

Real GDP: different countries

Historical data, through Q1:2021 (start date varies by country); used in Table 2 and Figure 3.
https://data.oecd.org/gdp/quarterly-gdp.htm#indicator-chart (Total, percentage change relative to
previous period, quarterly)

Inflation forecast: different countries

Current data; used in Figure 10.
https://data.oecd.org/price/inflation-forecast.htm (quarterly, most recent)
I use the most distant forecast for each country; typically, 2-3 years out.

Real GDP long-term forecast: different countries

Current data; used in Figure 10.
https://data.oecd.org/gdp/real-gdp-long-term-forecast.htm#indicator-chart (annual)
Trend gross domestic product (GDP), including long-term baseline projections, in real terms.
This indicator is measured in USD at constant prices and Purchasing Power Parities (PPPs) of
2010. I use the series to derive the expected annualized growth rate over the next ten years.

10-year interest rate: different countries

Historical data, through Q1:2021 (start date varies by country); used in Table 2 and Figure 3.
https://data.oecd.org/interest/long-term-interest-rates.htm (Monthly)
Long-term interest rates (government bonds maturing in ten years) are generally averages of
daily rates, implied by the prices at which the government bonds are traded on financial markets.

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I use these interest rates for countries for which FactSet rates are unavailable (when both rates
are available they are similar).

A.3 University of Michigan’s Survey of Consumers

[Obtained on May 12, 2021]

Inflation forecast – next five years: U.S.

Historical data: Q1:1979 - Q1:2021
http://www.sca.isr.umich.edu/tables.html (Monthly)
Measures consumers’ expectations of average annual inflation over the next five years.

A4. Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters

[Obtained on May 12, 2021]
https://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-
forecasters

LT Inflation forecasts: U.S.

Historical data: Q4:1991-Q1:2021
Forecasts for the annual average rate of headline CPI inflation over the next 10 years (CPI10). I
use the median of the individual responses.

LT real GDP growth forecasts: U.S.

Historical data: Q1:1992-Q1:2021
Forecasts for the annual average rate of growth in real chain-weighted GDP over the next 10
years (RGDP10). Values are available only for the first quarter of each year. I use the median of
the individual responses, and I assume no change in the forecast in quarters Q2-Q4 of each year.

A.5 Fred
[Obtained on May 12, 2021]

Interest Rates: U.S.

5-Year U.S. Treasury yield; Historical data: Q2:1953-Q1:2021
https://fred.stlouisfed.org/data/DGS5.txt
10-Year U.S. Treasury yield; Historical data: Q2:1953-Q1:2021
https://fred.stlouisfed.org/data/DGS10.txt
30-Year U.S. Treasury yield; Historical data: Q1:1977-Q1:2021
https://fred.stlouisfed.org/data/DGS30.txt

10-Year Inflation Expectation Rate: U.S.

Historical data: Q1:1997-Q1:2021
Derived from the 10-Year U.S. Treasury yield and several series of 10-Year Inflation-indexed
Treasury securities.

5-Year, 5-Year Forward Inflation Expectation Rate: U.S.

Historical data: Q1:2003-Q1:2021
https://fred.stlouisfed.org/data/T5YIFR.txt

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Expected long-term GDP growth: U.S. – FOMC
Historical data: Q1:2009-Q1:2021
Longer Run FOMC Summary of Economic Projections for the Growth Rate of Real Gross
Domestic Product, Central Tendency, Midpoint
https://fred.stlouisfed.org/data/GDPC1CTMLR.txt

Expected long-term inflation: U.S. – FOMC

Historical data: Q1:2009-Q1:2021
Longer Run FOMC Summary of Economic Projections for the Personal Consumption
Expenditures Inflation Rate, Central Tendency, Midpoint
https://fred.stlouisfed.org/data/PCECTPICTMLR.txt

A.6 Markit
[Obtained on May 12, 2021]

CDS spreads: different countries

Historical data, through Q1:2021 (start date varied by country); used in Table 2, Figure 3, and
Figure 10.

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 Appendix B: Variable definitions (U.S.)

LTRate Long-term Treasury rate = Five-year forward five-year Treasury rate

InfN10Y Annualized inflation over the next ten years

InfN5Y Annualized inflation over the next five years

EInfCS Expected inflation over the next five years – consumer survey

EInfPS Expected inflation over the next ten years – survey of professional forecasters

EInfD10Y Expected inflation over the next ten years – derived from Treasuries

EInfD5YF Expected inflation 5-Year, 5-Year Forward – derived from Treasuries

EInfFOMC Expected long-run inflation (PCECTPICTMLR) – FOMC

EInf Expected long-term inflation, measured as the mean value of EInfCS, EInfPS,
EInfD10Y, EInfD5YF, EInfFOMC. EInf is calculated as long as at least one of the
five variables is non-missing.

RGrN10Y Annualized growth in real GDP over the next ten years

RGrN5Y Annualized growth in real GDP over the next five years

LTRR LT real interest rate = (1 + LTRate) / (1 + EInf) - 1

ERGrPS Expected real GDP growth over the next ten years – survey of professional
forecasters

ERGrFOMC Expected long-run real GDP growth (PCECTPICTMLR) – FOMC

ERGr Expected long-term real GDP growth, measured as the mean value of LTRR,
ERGrPS, and ERGrFOMC. ERGr is calculated as long as at least one of the three
variables is non-missing.

ENGr Expected long-term nominal GDP growth = coalesce ([1 + ERGr] × [1 + EInf] - 1,
LTRate).

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 References

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Petersen, Mitchell A. 2009. Estimating Standard Errors in Finance Panel Data Sets: Comparing
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 Table 1
Annualized nominal GDP growth regressed on beginning-of-period LT Treasury rate

LT Treasury
Sample period (base Q) Realized GDP measure Intercept Rate R-squared Obs.
Q2:1953-Q1:2011 Next 10 years 0.056 0.136 0.027 232
9.9 2.1
Q2:1953-Q1:2016 Next 5 years 0.041 0.365 0.177 252
7.9 4.9
Q2:1953-Q2:1972 Next 10 years 0.026 1.184 0.843 77
5.0 10.1
Q3:1972-Q4:1991 Next 10 years 0.105 -0.336 0.174 78
7.5 -2.7
Q1:1992-Q1:2011 Next 10 years 0.007 0.635 0.639 77
1.7 8.7

The table reports results from time-series regressions of two measures of annualized nominal GDP growth—over ten
and five years—on the long-term interest rate at the beginning of the growth period. The LT Treasury yield is
measured using the five-year forward five-year rate. The sample consists of quarterly observations for the U.S.
starting in Q2:1953, with GDP growth measured through Q1:2021. The t-statistics are calculated using Newey-West
standard errors with three lags (see Greene (2012), page 960, concerning the selection of the number of lags).

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 Table 2
Annualized nominal GDP growth regressed on beginning-of-period nominal risk-free rate

Intercept NLTRf R-squared Obs.

Annualized nominal GDP growth – next 10 years -0.009 1.114 0.426 1,079
-1.3 8.9
Annualized nominal GDP growth – next 5 years 0.023 0.597 0.217 1,796
3.7 3.3

The table reports results of unbalanced panel data regressions (across 37 countries and over the period Q1:2002-
Q1:2021) of two measures of annualized nominal GDP growth—over ten and five years—on the nominal long-term
risk-free interest rate at the beginning of the growth period (NLTRf). NLTRf is measured using the longest available
government yield and CDS spread (30, 25, 20, 15 or 10 years). The t-statistics are calculated using two-ways
(country and quarter) clustered standard errors (Petersen 2009).

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 Table 3
Correlation coefficients among measures of expected and realized inflation

InfN10Y InfN5Y EInfCS EInfPS EInfD10Y EInfD5YF EInfFOMC

127 149 169
InfN10Y 0.94 0.88
0.00 0.00
InfN5Y 0.94 0.85
0.00 0.00
EInfCS 0.88 0.85
0.00 0.00
78 98 118 118
InfN10Y 0.57 -0.11 0.03
0.00 0.34 0.80
InfN5Y 0.57 -0.13 0.01
0.00 0.21 0.93
EInfCS -0.11 -0.13 0.82
0.34 0.21 0.00
EInfPS 0.03 0.01 0.82
0.80 0.93 0.00
57 77 97 97 97
InfN10Y 0.64 -0.08 0.38 -0.24
0.00 0.56 0.00 0.08
InfN5Y 0.64 -0.14 0.29 -0.22
0.00 0.21 0.01 0.06
EInfCS -0.08 -0.14 0.54 0.39
0.56 0.21 0.00 0.00
EInfPS 0.38 0.29 0.54 0.18
0.00 0.01 0.00 0.08
EInfD10Y -0.24 -0.22 0.39 0.18
0.08 0.06 0.00 0.08
33 53 73 73 73 73
InfN10Y 0.96 -0.28 0.03 0.10 0.04
0.00 0.11 0.86 0.57 0.84
InfN5Y 0.96 -0.19 0.33 0.03 -0.11
0.00 0.18 0.01 0.83 0.43
EInfCS -0.28 -0.19 0.47 0.55 0.58
0.11 0.18 0.00 0.00 0.00
EInfPS 0.03 0.33 0.47 0.20 0.22
0.86 0.01 0.00 0.08 0.06
EInfD10Y 0.10 0.03 0.55 0.20 0.92
0.57 0.83 0.00 0.08 0.00
EInfD5YF 0.04 -0.11 0.58 0.22 0.92
0.84 0.43 0.00 0.06 0.00
9 29 49 49 49 49 49
InfN10Y 0.10 0.40 -0.56 0.74 0.73 -0.25
0.80 0.29 0.12 0.02 0.02 0.52
InfN5Y 0.10 -0.29 0.17 -0.46 -0.47 -0.12
0.80 0.13 0.38 0.01 0.01 0.53
EInfCS 0.40 -0.29 0.30 0.52 0.64 -0.40
0.29 0.13 0.03 0.00 0.00 0.00
EInfPS -0.56 0.17 0.30 0.16 0.31 -0.42
0.12 0.38 0.03 0.28 0.03 0.00
EInfD10Y 0.74 -0.46 0.52 0.16 0.92 -0.13
0.02 0.01 0.00 0.28 0.00 0.36
EInfD5YF 0.73 -0.47 0.64 0.31 0.92 -0.31
0.02 0.01 0.00 0.03 0.00 0.03
EInfFOMC -0.25 -0.12 -0.40 -0.42 -0.13 -0.31
0.52 0.53 0.00 0.00 0.36 0.03

The table reports Pearson correlation coefficients and corresponding p-values (below the coefficients). The variables
are defined in Appendix B. Each correlation matrix uses observations with non-missing values for each of the
expected inflation measures. The number of observations (quarters) of each variable is reported above the column
for each correlation matrix. The sample consists of quarterly observations for the U.S. over the period starting in
Q1:1979, with realized inflation measured through Q1:2021.

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 Table 4
Annualized inflation regressed on beginning-of-period expected LT inflation

Annualized inflation Expected LT

Sample period (base Q) over Intercept inflation R-squared Obs.
Q1:1979-Q1:2011 Next 10 years 0.009 0.390 0.753 129
6.2 9.3
Q1:1979-Q1:2016 Next 5 years 0.005 0.553 0.707 149
2.2 7.7
Q1:1979-Q4:1991 Next 10 years 0.008 0.412 0.681 52
2.1 5.3
Q1:1992-Q1:2011 Next 10 years 0.020 -0.020 0.002 77
8.0 -0.3

The table reports results from time-series regressions of two measures of annualized inflation—over ten and five
years—on expected LT inflation at the beginning of the growth period (EInf; see Appendix B). The sample consists
of quarterly observations for the U.S. starting in Q1:1979, with realized inflation measured through Q1:2021. The t-
statistics are calculated using Newey-West standard errors with three lags (see Greene (2012), page 960, concerning
the selection of the number of lags).

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 Table 5
Correlation coefficients among measures of expected and subsequent real GDP growth

RGrN10Y RGrN5Y LTRR ERGrPS ERGrFOMC

129 149 169
RGrN10Y 0.76 0.53
0.00 0.00
RGrN5Y 0.76 0.59
0.00 0.00
LTRR 0.53 0.59
0.00 0.00
77 97 117 117
RGrN10Y 0.83 0.66 -0.70
0.00 0.00 0.00
RGrN5Y 0.83 0.56 -0.45
0.00 0.00 0.00
LTRR 0.66 0.56 0.41
0.00 0.00 0.00
ERGrPS -0.70 -0.45 0.41
0.00 0.00 0.00
9 29 49 49 49
RGrN10Y -0.22 0.24 -0.55 -0.58
0.56 0.54 0.12 0.10
RGrN5Y -0.22 0.19 0.32 0.41
0.56 0.31 0.09 0.03
LTRR 0.24 0.19 0.66 0.76
0.54 0.31 0.00 0.00
ERGrPS -0.55 0.32 0.66 0.82
0.12 0.09 0.00 0.00
ERGrFOMC -0.58 0.41 0.76 0.82
0.10 0.03 0.00 0.00

The table reports Pearson correlation coefficients and corresponding p-values (below the coefficients). The variables
are defined in Appendix B. Each correlation matrix uses observations with non-missing values for each of the
expected growth measures. The number of observations (quarters) of each variable is reported above the column for
each correlation matrix. The sample consists of quarterly observations for the U.S. over the period starting in
Q1:1979, with realized growth measured through Q1:2021.

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 Table 6
Annualized real GDP growth regressed on beginning-of-period real interest rate

Realized GDP growth LT real

Sample period (base Q) measure Intercept interest rate R-squared Obs.
Q1:1979-Q1:2011 Next 10 years 0.018 0.245 0.279 129
6.6 4.5
Q1:1979-Q1:2016 Next 5 years 0.016 0.338 0.345 149
6.3 6.4
Q1:1979-Q4:1991 Next 10 years 0.033 -0.005 0.003 52
27.3 -0.2
Q1:1992-Q1:2011 Next 10 years 0.003 0.703 0.569 77
1.0 6.7

The table reports results from time-series regressions of two measures of annualized real GDP growth—over ten and
five years—on the long-term real interest rate at the beginning of the growth period (LTRR; see Appendix B). The
sample consists of quarterly observations for the U.S. starting in Q1:1979, with GDP growth measured through
Q1:2021. The t-statistics are calculated using Newey-West standard errors with three lags (see Greene (2012), page
960, concerning the selection of the number of lags).

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 Table 7
Annualized real GDP growth regressed on beginning-of-period forecasted real GDP
growth

Realized GDP growth Forecasted

Sample period (base Q) measure Intercept GDP growth R-squared Obs.
Q1:1979-Q1:2011 Next 10 years 0.019 0.204 0.177 129
6.8 4.0
Q1:1979-Q1:2016 Next 5 years 0.016 0.325 0.243 149
5.4 5.5
Q1:1979-Q4:1991 Next 10 years 0.033 -0.005 0.002 52
27.3 -0.2
Q1:1992-Q1:2011 Next 10 years -0.005 0.989 0.150 77
-0.6 2.8

The table reports results from time-series regressions of two measures of annualized real GDP growth—over ten and
five years—on a composite measure of expected real GDP growth at the beginning of the growth period (ERGr; see
Appendix B). The sample consists of quarterly observations for the U.S. starting in Q1:1979, with GDP growth
measured through Q1:2021. The t-statistics are calculated using Newey-West standard errors with three lags (see
Greene (2012), page 960, concerning the selection of the number of lags).

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 Table 8
Annualized nominal GDP growth regressed on beginning-of-period forecasted nominal
GDP growth

Annualized nominal Forecasted

Sample period (base Q) GDP growth over Intercept growth R-squared Obs.
Q2:1953-Q1:2011 Next 10 years 0.057 0.125 0.022 232
10.4 2.0
Q2:1953-Q1:2016 Next 5 years 0.041 0.350 0.147 252
7.7 4.6
Q2:1953-Q2:1972 Next 10 years 0.026 1.184 0.843 77
5.0 10.1
Q3:1972-Q4:1991 Next 10 years 0.105 -0.336 0.174 78
7.5 -2.7
Q1:1992-Q1:2011 Next 10 years -0.006 0.873 0.485 77
-0.8 6.4

The table reports results from time-series regressions of two measures of annualized nominal GDP growth—over ten
and five years—on expected nominal GDP growth at the beginning of the growth period (ENGr; see Appendix B).
The sample consists of quarterly observations for the U.S. starting in Q2:1953, with GDP growth measured through
Q1:2021. The t-statistics are calculated using Newey-West standard errors with three lags (see Greene (2012), page
960, concerning the selection of the number of lags).

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See Appendix A for data sources and Appendix B for variable definitions.

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See Appendix A for data sources and Appendix B for variable definitions.

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The figure presents country/quarter observations of annualized growth in nominal GDP over ten years (Y-axis) and
the long-term risk-free interest rate at the beginning of the growth period (X-axis), which is measured using the
longest available government yield and CDS spread (30, 25, 20, 15 or 10 years). The sample covers 37 countries
during the period starting Q1:2002, with GDP growth measured through Q1:2021. The line represents expected
long-term economy-wide growth based on the long-term risk-free interest rate.

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See Appendix A for data sources and Appendix B for variable definitions.

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See Appendix A for data sources and Appendix B for variable definitions.

40

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See Appendix A for data sources and Appendix B for variable definitions.

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See Appendix A for data sources and Appendix B for variable definitions.

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See Appendix A for data sources and Appendix B for variable definitions.

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See Appendix A for data sources and Appendix B for variable definitions.

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The figure presents the relationship between forecasts of LT nominal GDP growth and the risk-free interest rate
across countries for which the information required to measure these variables was available from Markit (CDS
spread) and either FactSet or the OECD (interest rates, expected inflation and real GDP growth) in May 2021. The
risk-free interest rate is measured using the longest available government yield and CDS spread (30, 25, 20, 15 or 10
years). See Appendix A for data sources.

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