IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/11467.html
   My bibliography  Save this paper

Reflections on the natural rate of interest, its measurement, monetary policy and the zero lower bound

Author

Listed:
  • Cukierman, Alex

Abstract

Persistent decreases in interest rates since the beginning of the twenty first century and the intensification of this trend with the onset of the global financial crisis nurtured the view that the natural rate is substantially lower than it used to be, and by some estimates, even persistently negative. Although investment activity depends mainly on risky rates existing estimates of the natural rate focus mainly on estimation of natural (mostly short term) riskless rates. Gilchrist and Zakrajsek (2012) find that, particularly during crisis times, risky and riskless rates tend to move in opposite directions and that the spread between risky and riskless rates is a good predictor of subsequent economic activity. Drawing on those findings the paper makes a case for conceptualizing and estimating a risky natural rate. This rate which better reflects the impact of the financial system on economic activity, is practically always bounded away from the zero lower bound. After documenting and reviewing the downward trend in world interest rates and the reasons underlying it the paper argues that recent post crisis estimates of the riskless natural rate are likely to be biased downward. Recent estimate of the (unobservable) natural rate are obtained by applying either the Kalman filter or Bayesian estimation to alternative standard versions of the New Keynesian (NK) model. The crisis substantially increased the tightening impact of credit rationing on the New Keynesian (NK) IS relation and the relative importance of the financial stability motive in the monetary policy rule. Since the standard NK model abstracts from credit rationing and from the financial stability motive existing estimates of the natural rate are likely to be biased downward, particularly so since the onset of the crisis.

Suggested Citation

  • Cukierman, Alex, 2016. "Reflections on the natural rate of interest, its measurement, monetary policy and the zero lower bound," CEPR Discussion Papers 11467, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11467
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11467
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Curdia, Vasco, 2015. "Why so slow? A gradual return for interest rates," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    2. Ben S. Bernanke, 2007. "Global imbalances: recent developments and prospects," Speech 317, Board of Governors of the Federal Reserve System (U.S.).
    3. John B. Taylor & Volker Wieland, 2016. "Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(3), pages 147-154, July.
    4. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, November.
    5. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    6. Jordi GalĂ­, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
    7. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    8. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    9. repec:fip:fedgsq:y:2007:i:sep11 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brissimis, Sophocles N. & Papafilis, Michalis & Vlassopoulos, Thomas, 2018. "Some Thoughts on the External Finance Premium and the Cost of Internal Finance," MPRA Paper 85261, University Library of Munich, Germany.
    2. Mariarosaria Comunale & Jonas Striaukas, 2017. "Unconventional monetary policy: interest rates and low inflation: A review of literature and methods," CAMA Working Papers 2017-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    4. Krustev, Georgi, 2018. "The natural rate of interest and the financial cycle," Working Paper Series 2168, European Central Bank.
    5. Rasa Stasiukynaite, 2017. "Understanding Monetary Policy Stance," Bank of Lithuania Occasional Paper Series 14, Bank of Lithuania.

    More about this item

    Keywords

    downward bias in natural rate estimates; risky natural rate;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G1 - Financial Economics - - General Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:11467. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.