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What anchors for the natural rate of interest?

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

PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: The paper takes a critical look at the conceptual and empirical underpinnings of prevailing explanations of 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. The policy regime is not neutral and 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: Mutual funds returns; Investment horizon; Asset pricing; Institutional ownership (search for similar items in EconPapers)
JEL-codes: E32 E40 E44 E50 E52 (search for similar items in EconPapers)
Pages: 50 page
Date: 2018-11, Revised 2018-11
References: View references in EconPapers View complete reference list from CitEc
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Published in PIER Discussion Paper Series

Downloads: (external link) Published version, 2018 (application/pdf)

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Working Paper: What anchors for the natural rate of interest? (2019) Downloads
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