Globalization, Market Power, and the Natural Interest Rate

Jean-Marc Natal and Nicolas Stoffels

No 2019/095, IMF Working Papers from International Monetary Fund

Abstract: We argue that strong globalization forces have been an important determinant of global real interest rates over the last five decades, as they have been key drivers of changes in the natural real interest rate—i.e. the interest rate consistent with output at its potential and constant inflation. An important implication of our analysis is that increased competition in goods and labor market since the 1970s can help explain both the large increase in real interest rates up to the mid-1980s and—as globalization forces mature and may even go into reverse, leading to incrementally rising market power—its subsequent and protracted decline accompanied by lower inflation. The analysis has important implications for monetary policy and the optimal pace of normalization.

Keywords: WP; low interest rate puzzle; globalization; natural interest rate; real interest rates; markups; globalization premium; reaction function; price markup; globalization process; goods market; Long term interest rates; Labor markets; Productivity; Global (search for similar items in EconPapers)
Pages: 25
Date: 2019-05-06
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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