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Three Theories of Natural Rate Dynamics

Author

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  • Galo Nuño

    (BANCO DE ESPAÑA, CEMFI AND CEPR)

Abstract

The natural interest rate is the real rate that would prevail in the long run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors, such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: i) that the natural rate depends on fiscal policy via the stock of risk-free assets; ii) that it depends on monetary policy via the central bank inflation target; and iii) that it depends on persistent supply shocks, such as tariffs or wars. These three theories share the relevance of precautionary saving motives. The paper concludes by drawing some lessons for monetary policy design.

Suggested Citation

  • Galo Nuño, 2025. "Three Theories of Natural Rate Dynamics," Working Papers 2528, Banco de España.
    • Handle: RePEc:bde:wpaper:2528
    DOI: https://doi.org/10.53479/40086
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    References listed on IDEAS

    as
    1. Adam, Klaus & Billi, Roberto M., 2007. "Discretionary monetary policy and the zero lower bound on nominal interest rates," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 728-752, April.
    2. Matthias Hansel, 2024. "Idiosyncratic Risk, Government Debt and Inflation," Papers 2403.00471, arXiv.org, revised Nov 2024.
    3. Hänsel, Matthias, 2024. "Idiosyncratic Risk, Government Debt and Inflation," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302403, Verein für Socialpolitik / German Economic Association.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial HANK model; monetary-fiscal interactions; deep learning; cost-push shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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