It is Only Natural: Europe’s Low Interest Rates

Marco Arena, C. Di Bella (), Alfredo Cuevas, Borja Gracia, Huong Nguyen and Alex Pienkowski

No 2020/116, IMF Working Papers from International Monetary Fund

Abstract: Estimates of the natural interest rate are often useful in the analysis of monetary and other macroeconomic policies. The topic gathered much attention following the great financial crisis and the Euro Area debt crisis due to the uncertainty regarding the timing of monetary policy normalization and the future path of interest rates. Using a sample of European countries (including several members of the Euro Area), this paper provides estimates of country-specific natural interest rates and some of their drivers between 2000 and 2019. In line with the literature, our findings suggest that natural interest rates declined during this period, and despite a rebound in the last few years of it, they have not recovered to their pre-crisis levels. The paper also discusses the implications of the decline in natural interest rates for monetary conditions and debt sustainability.

Keywords: WP; monetary policy; math display; fiscal policy; policy rate; country risk; risk premium; central bank; shadow rate; reserve currency; Real interest rates; Output gap; Global financial crisis of 2008-2009; Central bank policy rate; Europe; Global; Natural interest rate; Neutral interest rate; debt sustainability; Bayesian estimation; T-bill rate; market data; monetary policy stance (search for similar items in EconPapers)
Pages: 59
Date: 2020-07-03
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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