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The natural rate of interest from a monetary and financial perspective

Dennis Bonam (), Peter van Els, Jan Willem End (), Leo de Haan () and Irma Hindrayanto

DNB Occasional Studies from Netherlands Central Bank, Research Department

Abstract: The natural rate of interest (r*) is an important monetary policy variable in economic literature. It serves as a benchmark for the policy rate in an equilibrium. It also plays a role in the ongoing debate about unconventional monetary policy, for instance in the development of opinions on the lower bound of the policy rate and on the current low market interest rates. To illustrate: the 'secular stagnation' hypothesis posits that the low real market interest rates are an expression of a negative value of r*. This hypothesis argues that this has consequences for monetary policy, which - according to the predominant theory - stimulates the economy by lowering the policy rate (adjusted for inflation) to below r*. When r* is negative, however, this is not possible because of the lower bound set for the policy rate. This, it is argued, impedes the ability of monetary policy to stimulate the economy.

Date: 2018-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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