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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 (Print copy discontinued), 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. Tom Cusbert, 2017. "Estimating the NAIRU and the Unemployment Gap," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 13-22, June.
    3. Thomas A. Lubik & Christian Matthes, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct.
    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. 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.
    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. Melissa van Rensburg, 2023. "Long-run trends in New Zealand’s real neutral interest rate," Treasury Analytical Notes Series an23/05, New Zealand Treasury.
    2. Daniel Rees & Guofeng Sun, 2021. "The natural interest rate in China," BIS Working Papers 949, Bank for International Settlements.
    3. Tim Atkin & Gianni La Cava, 2017. "The Transmission of Monetary Policy: How Does It Work?," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 01-08, September.
    4. 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.
    5. Tim Robinson & Jiao Wang, 2018. "The Australian Economy in 2017–2018: The Importance of Stronger Non†Mining Business Investment Growth," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 5-20, March.
    6. Taylor, Alan M. & Davis, Josh & Fuenzalida, Cristian, 2019. "The Natural Rate Puzzle: Global Macro Trends and the Market-Implied r," CEPR Discussion Papers 14201, C.E.P.R. Discussion Papers.
    7. Mishra, Ankita & Moosa, Imad A. & Tawadros, George B. & Mishra, Vinod, 2023. "The effect of political and bureaucratic regime changes on Australia's real interest rate," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 124-136.
    8. Guay Lim & Viet Nguyen & Tim Robinson & Sarantis Tsiaplias & Jiao Wang, 2021. "The Australian Economy in 2020–21: The COVID‐19 Pandemic and Prospects for Economic Recovery," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(1), pages 5-18, March.
    9. Chris Edmond & Richard Holden & Bruce Preston, 2020. "Should We Worry about Government Debt? Thoughts on Australia's COVID‐19 Response," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 557-565, December.
    10. Davis, Josh & Fuenzalida, Cristian & Huetsch, Leon & Mills, Benjamin & Taylor, Alan M., 2024. "Global natural rates in the long run: Postwar macro trends and the market-implied r∗ in 10 advanced economies," Journal of International Economics, Elsevier, vol. 149(C).
    11. Efrem Castelnuovo & Guay Lim & Giovanni Pellegrino, 2018. "Macroeconomic Policies in a Low Interest Rate Environment: Back to Keynes?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 70-86, March.
    12. Claudio Borio, 2021. "Navigating by r*: safe or hazardous?," BIS Working Papers 982, Bank for International Settlements.

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