The Natural Rate of Interest and the Optimal Rate of Interest in the Steady State

Carl Christian von Weizsäcker () and Hagen Krämer
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Carl Christian von Weizsäcker: Max Planck Institute for Research on Collective Goods

Chapter Chapter 2 in Saving and Investment in the Twenty-First Century, 2021, pp 17-41 from Springer

Abstract: Abstract The “natural rate of interestRate of interest, natural” is the hypothetical, riskRisk-free real rate of interest that would obtain in a closed economy, if net public debt were zero. It is considerably less than the optimal steady-stateSteady state rate of interest, which is equal to the system’s growth rate. This holds for a very general “meta-modelMeta-model.” The fundamental equation of capital theoryCapital theory holds on the optimal steady-stateSteady state path: T = Z − D, where T is the overall economic period of productionPeriod of production, Z is the representative private “waiting periodWaiting period” of consumers and D is the public debt ratio. ProsperityProsperity is at least 30% lower at the natural rate of interestRate of interest, natural than at the optimal rate.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-75031-2_2

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DOI: 10.1007/978-3-030-75031-2_2

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