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Atheoretical and Theory-Based Approaches to the Natural Equilibrium Real Interest Rate

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  • Philip Arestis

    (Department of Land Economy, Cambridge Centre for Economic and Public Policy, University of Cambridge, 19 Silver Street, Cambridge CB3 9EP, UK.)

  • Georgios E Chortareas

    (Department of Economics, University of Athens, Euripidou 14, Athens, Greece.)

Abstract

Recent theoretical developments and practical monetary policy concerns have revived interest on the concept of a “natural” equilibrium real interest rate. The natural real interest rate is potentially an important concept for monetary policy makers. The observable market real interest rate and the natural real rate may deviate and the resulting gap can be used to evaluate the stance of monetary policy. A number of diverse empirical approximations to the natural rate exist causing a great deal of uncertainty about its value and concern about its applicability among central bankers. In this paper, we first examine the notion of the natural rate in view of the different interpretations that have been attached to the — unobservable — natural real interest rate and we summarize and critically evaluate the existing approaches for quantifying it. We then use a dynamic stochastic general equilibrium framework to obtain a theory-based measure of the natural interest rate in the US that is time varying. Eastern Economic Journal (2008) 34, 390–405. doi:10.1057/palgrave.eej.9050040

Suggested Citation

  • Philip Arestis & Georgios E Chortareas, 2008. "Atheoretical and Theory-Based Approaches to the Natural Equilibrium Real Interest Rate," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 34(3), pages 390-405.
    • Handle: RePEc:pal:easeco:v:34:y:2008:i:3:p:390-405
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    Cited by:

    1. Kleczka, Mitja, 2015. "Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone," MPRA Paper 67228, University Library of Munich, Germany.
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    3. Philip Arestis & Malcolm Sawyer, 2010. "What Monetary Policy after the Crisis?," Review of Political Economy, Taylor & Francis Journals, vol. 22(4), pages 499-515.

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