It is Only Natural: Europe's Low Interest Rates

60 Pages Posted: 23 Jul 2020

See all articles by Marco Arena

Marco Arena

International Monetary Fund (IMF)

C. Gabriel Di Bella

International Monetary Fund (IMF)

Alfredo Cuevas

International Monetary Fund (IMF)

Borja Gracia

Yale University

Huong (Vina) Nguyen

International Monetary Fund (IMF)

Alex Pienkowski

International Monetary Fund

Date Written: July 1, 2020

Abstract

Estimates of the natural interest rate are often useful in the analysis of monetary and other macroeconomic policies. The topic gathered much attention following the great financial crisis and the Euro Area debt crisis due to the uncertainty regarding the timing of monetary policy normalization and the future path of interest rates. Using a sample of European countries (including several members of the Euro Area), this paper provides estimates of country-specific natural interest rates and some of their drivers between 2000 and 2019. In line with the literature, our findings suggest that natural interest rates declined during this period, and despite a rebound in the last few years of it, they have not recovered to their pre-crisis levels. The paper also discusses the implications of the decline in natural interest rates for monetary conditions and debt sustainability.

Keywords: Economic stabilization, Economic integration, Economic policy, Economic analysis, Financial crises, Natural interest rate, Neutral interest rate, monetary policy, debt sustainability, Bayesian estimation, WP, euro area, potential growth, GFC, output gap, natural rate

JEL Classification: E40, E5, H6, C10, E01, G21, E52, D4, E63

Suggested Citation

Arena, Marco and Di Bella, C. Gabriel and Cuevas, Alfredo and Gracia, Borja and Nguyen, Huong and Pienkowski, Alex, It is Only Natural: Europe's Low Interest Rates (July 1, 2020). IMF Working Paper No. 20/116, Available at SSRN: https://ssrn.com/abstract=3658591

Marco Arena (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

C. Gabriel Di Bella

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alfredo Cuevas

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Borja Gracia

Yale University ( email )

493 College St
New Haven, CT CT 06520
United States

Huong Nguyen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alex Pienkowski

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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