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The natural rate of interest: estimates, drivers, and challenges to monetary policy

Author

Listed:
  • Claus Brand

    (European Central Bank)

  • Marcin Bielecki

    (Narodowy Bank Polski)

  • Adrian Penalver

    (Banque de France)

Abstract

Using a wide range of models we document a protracted fall in the natural (or neutral) rate of interest in advanced economies, driven by ageing, waning productivity growth, arise in mark-ups, and a surge in risk aversion in the wake of the global financial crisis. While our neutral rate estimates are highly uncertain and model dependent, most of them have been negative in the wake of the financial crisis. This observation is highly relevant for assessing the monetary policy stance and the risk of monetary policy becoming constrained by the lower bound on nominal interest rates. We highlight model dependence of natural rate estimates by illustrating large differences in their stabilising properties, depending on the context chosen. We also emphasise high statistical uncertainty of natural rate estimates within models. Looking ahead, a return to higher levels would have to come from a reversal in risk aversion and flight to safety and a boost in productivity. To achieve this, structural reforms are crucial.

Suggested Citation

  • Claus Brand & Marcin Bielecki & Adrian Penalver, 2019. "The natural rate of interest: estimates, drivers, and challenges to monetary policy," NBP Working Papers 308, Narodowy Bank Polski, Economic Research Department.
  • Handle: RePEc:nbp:nbpmis:308
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    File URL: http://www.nbp.pl/publikacje/materialy_i_studia/308_en.pdf
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    Cited by:

    1. Clarida, Richard H., 2019. "The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices : A speech at "Fed Listens: A Capstone Roundtable" hosted by the Federal Reserve Bank of New ," Speech 1062, Board of Governors of the Federal Reserve System (U.S.).
    2. Clarida, Richard H., 2019. "The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices : A speech at "New England Perspectives on Fed Policymaking: A 'Fed Listens' Conference" host," Speech 1063, Board of Governors of the Federal Reserve System (U.S.).
    3. Brand, Claus & Mazelis, Falk, 2019. "Taylor-rule consistent estimates of the natural rate of interest," Working Paper Series 2257, European Central Bank.
    4. Sweder van Wijnbergen, 2018. "Real interest rates, exchange rates and the ZLB: on Secular Stagnation," Tinbergen Institute Discussion Papers 18-032/VI, Tinbergen Institute, revised 28 Oct 2018.
    5. Clarida, Richard H., 2019. "The Federal Reserve's Review of Its Monetary Policy Strategy, Tools, and Communication Practices, a speech at "The Bank of Finland Conference on Monetary Policy and Future of EMU [Economic and Mo," Speech 1075, Board of Governors of the Federal Reserve System (U.S.).
    6. Clarida, Richard H., 2019. "The Federal Reserve's Review of Its Monetary Policy Strategy, Tools, and Communication Practices : a speech at the "Fed Listens: Distributional Consequences of the Cycle and Monetary Policy"," Speech 1054, Board of Governors of the Federal Reserve System (U.S.).
    7. Clarida, Richard H., 2019. "Sustaining Maximum Employment and Price Stability : a speech at the Economic Club of New York, New York, New York, May 30, 2019," Speech 1067, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Natural rate of interest; return on capital; demographics; productivity growth; monetary policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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