The Riddle of the Natural Rate of Interest

Weshah Razzak

MPRA Paper from University Library of Munich, Germany

Abstract: We rely on microeconomics theory to compute the natural rate of interest for the G7 countries from 2001 to 2017. The equilibrium natural rate of interest is determined by a parsimonious equation that is easily computed from readily observable data, hence no estimation errors. The model predicts that the natural rate of interest is equal to the consumption-leisure growth rate less the capital-labor growth rate, which is zero in the steady state, no growth. It is positive (negative) when the consumption-leisure growth gap is greater (smaller) than the capital-labor growth gap. The model predicts that fiscal expansion is an expensive policy to stimulate the economy when the Zero Lower Bound (ZLB) constraint is binding.

Keywords: Natural rate of interest; Monetary policy (search for similar items in EconPapers)
JEL-codes: C68 E43 E52 (search for similar items in EconPapers)
Date: 2020-04, Revised 2020-08-25
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: The Riddle of the Natural Rate of Interest (2020)
Working Paper: The Riddle of the Natural Rate of Interest (2020)
Working Paper: The Riddle of the Natural Rate of Interest (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:102663

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