On Natural Interest Rate Volatility

Edouard Challe and Mykhailo Matvieiev ()
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Mykhailo Matvieiev: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: Episodes of low natural interest rates, even transitory, pose a challenge to monetary policy, by possibly causing the effective lower bound (ELB) on the policy rate to bind. Those episodes are more likely to occur not only when the natural rate is low on average but also when fluctuations around its average level are large. We study the responsiveness of the natural interest rate to structural aggregate shocks affecting the aggregate supply of and demand for savings. Using a quantitative overlapping-generations model, we trace back this responsiveness to the slopes of aggregate savings supply and demand curves and argue that both curves have likely flattened over the past four decades in the US This implies a greater sensitivity of the natural interest rate to structural shocks affecting the supply of and demand for aggregate savings – making it more likely, all else equal, that it fall into negative territory.

Keywords: Natural interest rate; Intertemporal income effects; Overlapping-generations (search for similar items in EconPapers)
Date: 2024-06
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Published in European Economic Review, 2024, 167, ⟨10.1016/j.euroecorev.2024.104796⟩

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Journal Article: On natural interest rate volatility (2024)
Working Paper: On Natural Interest Rate Volatility (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04645669

DOI: 10.1016/j.euroecorev.2024.104796

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