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Supplementary Paper Series for the "Comprehensive Assessment" (2): Developments in the Natural Rate of Interest in Japan

Author

Listed:
  • Shigeaki Fujiwara

    (Bank of Japan)

  • Yuto Iwasaki

    (Bank of Japan)

  • Ichiro Muto

    (Bank of Japan)

  • Kenji Nishizaki

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

Abstract

The natural rate of interest is the real interest rate at which economic activity and prices neither accelerate nor decelerate. The basic mechanism of monetary easing -- regardless of whether it is conducted through conventional or unconventional policy means -- consists of driving the real interest rate below the natural rate of interest. Theoretically, therefore, in order to assess the effects of monetary easing, it is necessary to estimate the natural rate of interest, which is by nature unobservable, and determine whether the real interest rate is higher or lower, relative to the estimated natural rate of interest. This paper estimates the natural rate of interest using a number of different approaches. While the estimates differ to some extent depending on the approach taken, the estimation results suggest that it is likely that Japan's natural rate of interest is currently at a low level of around 0 percent.

Suggested Citation

  • Shigeaki Fujiwara & Yuto Iwasaki & Ichiro Muto & Kenji Nishizaki & Nao Sudo, 2016. "Supplementary Paper Series for the "Comprehensive Assessment" (2): Developments in the Natural Rate of Interest in Japan," Bank of Japan Review Series 16-E-12, Bank of Japan.
    • Handle: RePEc:boj:bojrev:rev16e12
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    File URL: http://www.boj.or.jp/en/research/wps_rev/rev_2016/data/rev16e12.pdf
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    Cited by:

    1. Yoshihiko Hogen & Ryoichi Okuma, 2018. "The Anchoring of Inflation Expectations in Japan: A Learning-Approach Perspective," Bank of Japan Working Paper Series 18-E-8, Bank of Japan.
    2. repec:fip:fedfel:00164 is not listed on IDEAS
    3. 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.
    4. Nao Sudo & Yasutaka Takizuka, 2018. "Population Aging and the Real Interest Rate in the Last and Next 50 Years -- A tale told by an Overlapping Generations Model --," Bank of Japan Working Paper Series 18-E-1, Bank of Japan.
    5. Michal Franta, 2018. "The likelihood of effective lower bound events," BIS Working Papers 731, Bank for International Settlements.
    6. Williams, John C., 2017. "Three Questions on R-star," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    7. Williams, John C., 2017. "Interest Rates and the "New Normal"," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    8. Yosuke Okazaki & Nao Sudo, 2018. "Natural Rate of Interest in Japan -- Measuring its size and identifying drivers based on a DSGE model --," Bank of Japan Working Paper Series 18-E-6, Bank of Japan.
    9. Williams, John C., 2018. "The Future Fortunes of R-star: Are They Really Rising?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.

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