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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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    Citations

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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. John C. Williams, 2018. "The Future Fortunes of R-star: Are They Really Rising?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    3. John C. Williams, 2019. "When the Facts Change…: remarks at the 9th High-Level Conference on the International Monetary System, Zürich, Switzerland," Speech 320, Federal Reserve Bank of New York.
    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. Sudo, Nao & Takizuka, Yasutaka, 2020. "Population Aging And The Real Interest Rate In The Last And Next 50 Years: A Tale Told By An Overlapping Generations Model," Macroeconomic Dynamics, Cambridge University Press, vol. 24(8), pages 2060-2103, December.
    6. Pablo A. Cuba-Borda & Sanjay R. Singh, 2019. "Understanding Persistent Stagnation," International Finance Discussion Papers 1243, Board of Governors of the Federal Reserve System (U.S.).
    7. Pablo Cuba-Borda & Sanjay R. Singh, 2024. "Understanding Persistent ZLB: Theory and Assessment," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 389-416, July.
    8. Koeda, Junko, 2019. "Macroeconomic effects of quantitative and qualitative monetary easing measures," Journal of the Japanese and International Economies, Elsevier, vol. 52(C), pages 121-141.
    9. Hogen, Yoshihiko & Okuma, Ryoichi, 2025. "The anchoring of inflation expectations in Japan: A learning-approach perspective," Japan and the World Economy, Elsevier, vol. 73(C).
    10. Carrillo Julio A. & Elizondo Rocío & Rodríguez-Pérez Cid Alonso & Roldán-Peña Jessica, 2018. "What Determines the Neutral Rate of Interest in an Emerging Economy?," Working Papers 2018-22, Banco de México.
    11. Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2022. "Estimating a Nonlinear New Keynesian Model with the Zero Lower Bound for Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1637-1671, September.
    12. Franta, Michal, 2021. "The Likelihood Of Effective Lower Bound Events," Macroeconomic Dynamics, Cambridge University Press, vol. 25(8), pages 2058-2079, December.
    13. John C. Williams, 2017. "Three Questions on R-star," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    14. Klaus Adam & Oliver Pfäuti & Timo Reinelt, 2020. "Falling Natural Rates, Rising Housing Volatility and the Optimal Inflation Target," CRC TR 224 Discussion Paper Series crctr224_2020_235, University of Bonn and University of Mannheim, Germany.
    15. 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.
    16. John C. Williams, 2017. "Interest Rates and the \\"New Normal\\"," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    17. Wang, Bin & Kwan, Yum K., 2021. "Measuring the natural rates of interest of OECD and BRICS economies: A time varying perspective," Journal of International Money and Finance, Elsevier, vol. 112(C).

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