Three Theories of Natural Rate Dynamics

Galo Nuño
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Galo Nuño: BANCO DE ESPAÑA, CEMFI AND CEPR

No 2528, Working Papers from Banco de España

Abstract: The natural interest rate is the real rate that would prevail in the long run. The standard view in macroeconomics is that the natural rate depends exclusively on structural factors, such as productivity growth and demographics. This paper challenges this view by discussing three alternative, and complementary, views: i) that the natural rate depends on fiscal policy via the stock of risk-free assets; ii) that it depends on monetary policy via the central bank inflation target; and iii) that it depends on persistent supply shocks, such as tariffs or wars. These three theories share the relevance of precautionary saving motives. The paper concludes by drawing some lessons for monetary policy design.

Keywords: financial HANK model; monetary-fiscal interactions; deep learning; cost-push shocks (search for similar items in EconPapers)
JEL-codes: E32 E58 E63 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2025-06
New Economics Papers: this item is included in nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2528

DOI: 10.53479/40086

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