2020 US Neutral Rate Assessment

James Bootsma, Thomas Carter, Xin Scott Chen, Christopher Hajzler and Argyn Toktamyssov

No 2020-12, Discussion Papers from Bank of Canada

Abstract: This paper presents Bank of Canada staff’s current assessment of the US neutral rate, along with a newly developed set of models on which that assessment is based. The overall assessment is that the US neutral rate currently lies in a range of 1.75 to 2.75 percent. This represents a decline of 50 basis points relative to the range judged at the time of the Bank’s last neutral rate update in April 2019. Roughly half of this decline reflects an assessment of conditions prevailing in late 2019 and is thus unrelated to the COVID-19 pandemic. The other half reflects the balance of several key channels through which the COVID 19 shock is likely to influence US interest rates over the years ahead, including its impacts on potential output growth, inequality, demand for safe assets and the level of US government debt. Results from the new models specifically point to upward pressure from higher government debt being more than offset by downward pressure from lower potential output growth, higher inequality and heightened demand for safe assets.

Keywords: Economic models; Interest rates; Monetary policy (search for similar items in EconPapers)
JEL-codes: E40 E43 E50 E52 E58 F41 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2020-12
New Economics Papers: this item is included in nep-cba and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocadp:20-12

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