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Three Theories of Natural Rate Dynamics

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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 in ation target; and (iii) that it depends on persistent supply shocks such as tariffs or wars. These three theories share the relevance of precautionary savings motives. We conclude by drawing some lessons for monetary policy design.

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  • Galo Nuño, 2025. "Three Theories of Natural Rate Dynamics," CESifo Working Paper Series 11878, CESifo.
    • Handle: RePEc:ces:ceswps:_11878
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    Keywords

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    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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