The Natural Rate of Interest: Estimates, Drivers, and Challenges to Monetary Policy

71 Pages Posted: 5 Feb 2019

See all articles by Claus Brand

Claus Brand

European Central Bank (ECB)

Marcin Bielecki

University of Warsaw

Adrian Penalver

Banque de France

Date Written: December 19, 2018

Abstract

Using a wide range of models we document a protracted fall in the natural (or neutral) rate of interest in advanced economies, driven by ageing, waning productivity growth, a rise in mark-ups, and a surge in risk aversion in the wake of the global financial crisis. While our neutral rate estimates are highly uncertain and model dependent, most of them have been negative in the wake of the financial crisis. This observation is highly relevant for assessing the monetary policy stance and the risk of monetary policy becoming constrained by the lower bound on nominal interest rates. We highlight model dependence of natural rate estimates by illustrating large differences in their stabilising properties, depending on the context chosen. We also emphasise high statistical uncertainty of natural rate estimates within models. Looking ahead, a return to higher levels would have to come from a reversal in risk aversion and flight to safety and a boost in productivity. To achieve this, structural reforms are crucial.

Keywords: natural rate of interest, return on capital, demographics, productivity growth, monetary policy

JEL Classification: E52, E43

Suggested Citation

Brand, Claus and Bielecki, Marcin and Penalver, Adrian, The Natural Rate of Interest: Estimates, Drivers, and Challenges to Monetary Policy (December 19, 2018). ECB Occasional Paper No. 217 (2018); ISBN 978-92-899-3376-6. Available at SSRN: https://ssrn.com/abstract=3328536

Claus Brand (Contact Author)

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Marcin Bielecki

University of Warsaw ( email )

Adrian Penalver

Banque de France ( email )

Paris
France

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