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The Neutral Interest Rate

Author

Listed:
  • Rachael McCririck

    (Reserve Bank of Australia)

  • Daniel Rees

    (Reserve Bank of Australia)

Abstract

Central banks monitor the neutral interest rate for a number of reasons, a key one being that it provides a benchmark for assessing the stance of monetary policy. This article describes the determinants of the neutral interest rate and discusses its trends in Australia over recent decades. We estimate that Australia’s neutral interest rate has declined by 150 basis points since 2007 and is currently around 1 per cent. However, because we cannot observe the neutral rate directly, there is considerable uncertainty around these estimates. The fall over the past decade is largely attributable to a decline in the economy’s potential growth rate and an increase in risk aversion of households and firms.

Suggested Citation

  • Rachael McCririck & Daniel Rees, 2017. "The Neutral Interest Rate," RBA Bulletin, Reserve Bank of Australia, pages 09-18, September.
  • Handle: RePEc:rba:rbabul:sep2017-02
    as

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    File URL: https://www.rba.gov.au/publications/bulletin/2017/sep/pdf/bu-0917-2-the-neutral-interest-rate.pdf
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    References listed on IDEAS

    as
    1. David Lancaster & Peter Tulip, 2015. "Okun's Law and Potential Output," RBA Research Discussion Papers rdp2015-14, Reserve Bank of Australia.
    2. repec:rba:rbabul:jun2017-02 is not listed on IDEAS
    3. Hoffmann, Arvid O.I. & Post, Thomas & Pennings, Joost M.E., 2013. "Individual investor perceptions and behavior during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 60-74.
    4. 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.
    5. Lubik, Thomas A. & Matthes, Christian, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct, pages 1-6.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Perceptions of the neutral interest rate
      by Bruno Duarte in EUnomics on 2018-09-17 17:42:36

    Citations

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    Cited by:

    1. repec:rba:rbabul:sep2017-01 is not listed on IDEAS
    2. Mengheng Li & Irma Hindrayanto, 2018. "Looking for the stars: Estimating the natural rate of interest," Working Paper Series 51, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    3. repec:bla:ausecr:v:51:y:2018:i:1:p:5-20 is not listed on IDEAS
    4. repec:bla:ausecr:v:51:y:2018:i:1:p:70-86 is not listed on IDEAS

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