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The natural interest rate: concept, determinants and implications for monetary policy

Author

Listed:
  • Alessandro Galesi
  • Galo Nuño
  • Carlos Thomas

Abstract

This article defines the natural interest rate, analysing the concept and its role in monetary policy conduct. Estimates of the natural interest rate place it at historically low and even negative levels. Demographics and growth, but also the recent financial crisis with weak aggregate demand, deleveraging, etc., are identified as factors related to this decline. Lastly, the article highlights the difficulties that a natural rate of this type may pose to central banks in achieving their objectives, and it discusses potential monetary policy-related solutions, such as QE and changes in the monetary policy objective.

Suggested Citation

  • Alessandro Galesi & Galo Nuño & Carlos Thomas, 2017. "The natural interest rate: concept, determinants and implications for monetary policy," Economic Bulletin, Banco de España, issue MAR.
    • Handle: RePEc:bde:journl:y:2017:i:3:d:aa:n:7
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    References listed on IDEAS

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    2. Holston, Kathryn & Laubach, Thomas & Williams, John C., 2017. "Measuring the natural rate of interest: International trends and determinants," Journal of International Economics, Elsevier, vol. 108(S1), pages 59-75.
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    Cited by:

    1. Kan Chen & Nathaniel Karp, 2018. "Natural interest rates in the U.S., Canada and Mexico," Working Papers 18/07, BBVA Bank, Economic Research Department.
    2. Javier G. Gómez-Pineda, 2018. "A well-timed raise in inflation targets," Borradores de Economia 1042, Banco de la Republica de Colombia.
    3. Pablo Aguilar & Óscar Arce & Samuel Hurtado & Jaime Martínez-Martín & Galo Nuño & Carlos Thomas, 2020. "The ECB monetary policy response to the Covid-19 crisis," Occasional Papers 2026, Banco de España.
    4. Susana Párraga & Pedro del Río & Juan Luis Vega, 2019. "The Federal Reserve review of its monetary policy framework," Economic Bulletin, Banco de España, issue DEC.
    5. Pablo Aguilar & Óscar Arce & Samuel Hurtado & Jaime Martínez-Martín & Galo Nuño & Carlos Thomas, 2020. "La respuesta de la política monetaria del Banco Central Europeo frente a la crisis del Covid-19," Occasional Papers 2026, Banco de España.
    6. Davtyan, Karen, 2025. "Dynamics of the natural rate of interest and monetary policy," Finance Research Letters, Elsevier, vol. 72(C).
    7. Juan Carlos Berganza & Alberto Fuertes, 2018. "The flattening of the yield curve in the United States," Economic Bulletin, Banco de España, issue MAR.

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