Natural Interest Rate and Money Interest Rates

The long lasting period of declining interest rates raises the question, whether the latter result from a savings glut, from a money glut, or from both. Moreover, it renewed the old question how the natural interest rate should be sensibly defined, and if it could ever fall below the growth rate, thereby causing dynamic inefficiency. The present article contributes to this debate on a pure theoretical base, leaving the empirical issue for other research. In particular, I briefly discuss Böhm-Bawerk’s three causes for the existence of an interest rate in a private barter economy. I argue that the natural interest rate remains a meaningful concept even in an economy with both a public sector and money. From a welfare economic view, it is also preferable above the so-called golden rule, provided the interest rate does not fall below the growth rate. Although the natural interest rate could well get negative by excess saving in principle, this is normally prevented when durable goods like land or precious metals are available for storing private wealth. On the other hand, issuing credit money tends to push the interest rate below its natural level, even in the long run. In order to prevent this, one could either replace it by neutral helicopter money or return to a gold currency.