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What anchors for the natural rate of interest?

Claudio Borio (), Piti Disyatat () and Phurichai Rungcharoenkitkul

No 777, BIS Working Papers from Bank for International Settlements

Abstract: The paper takes a critical look at the conceptual and empirical underpinnings of prevailing explanations for low real (inflation-adjusted) interest rates over long horizons and finds them incomplete. The role of monetary policy, and its interaction with the financial cycle in particular, deserve greater attention. By linking booms and busts, the financial cycle generates important path dependencies that give rise to intertemporal policy trade-offs. Policy today constrains policy tomorrow. Far from being neutral, the policy regime can exert a persistent influence on the economy’s evolution, including on the real interest rate. This raises serious conceptual and practical questions about the use of the natural interest rate as a monetary policy guidepost. In developing the analysis, the paper also provides a specific critique of the safe asset shortage hypothesis – a hypothesis that has gained considerable popularity in recent years.

Keywords: Real interest rate; natural interest rate; saving; investment; inflation; monetary policy; safe asset shortage hypothesis (search for similar items in EconPapers)
JEL-codes: E32 E40 E44 E50 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2019-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5) Track citations by RSS feed

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