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The natural rate of interest from a monetary and financial perspective

Author

Listed:
  • Dennis Bonam
  • Peter van Els
  • Jan Willem van den End
  • Leo de Haan
  • Irma Hindrayanto

Abstract

The natural rate of interest (r*) is an important monetary policy variable in economic literature. It serves as a benchmark for the policy rate in an equilibrium. It also plays a role in the ongoing debate about unconventional monetary policy, for instance in the development of opinions on the lower bound of the policy rate and on the current low market interest rates. To illustrate: the 'secular stagnation' hypothesis posits that the low real market interest rates are an expression of a negative value of r*. This hypothesis argues that this has consequences for monetary policy, which - according to the predominant theory - stimulates the economy by lowering the policy rate (adjusted for inflation) to below r*. When r* is negative, however, this is not possible because of the lower bound set for the policy rate. This, it is argued, impedes the ability of monetary policy to stimulate the economy.

Suggested Citation

  • Dennis Bonam & Peter van Els & Jan Willem van den End & Leo de Haan & Irma Hindrayanto, 2018. "The natural rate of interest from a monetary and financial perspective," DNB Occasional Studies 1603, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbocs:1603
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    Cited by:

    1. Hongjin Li & Naifang Su, 2020. "Financial Factors, Openness and the Natural Interest Rate in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 76-100, July.
    2. Darracq Pariès, Matthieu & Notarpietro, Alessandro & Kilponen, Juha & Papadopoulou, Niki & Zimic, Srečko & Aldama, Pierre & Langenus, Geert & Alvarez, Luis Julian & Lemoine, Matthieu & Angelini, Elena, 2021. "Review of macroeconomic modelling in the Eurosystem: current practices and scope for improvement," Occasional Paper Series 267, European Central Bank.
    3. Yakov Ben-Haim & Jan Willem van den End, 2019. "Fundamental uncertainty about the natural rate of interest: Info-gap as guide for monetary policy," DNB Working Papers 650, Netherlands Central Bank, Research Department.

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