Еconomic Policy Under Global Flight to Safe Assets and Effective Lower Bound: the Bulgarian Prospects

natural rate is an abstraction; like faith, it is seen by its works. can only say if bank policy succeeds in stabilizing prices, bank rate must have been brought in line with natural rate, but if it does not, it must not have been. (1) THE CONVENTIONAL PARADIGM for conduct of monetary policy calls for monetary authority to attain its objectives of a low and stable rate of inflation and full employment by adjusting its short-term interest rate instrument--in United States, federal funds rate--in response to economic developments. In principle, when aggregate demand and employment fall short of economy's natural levels of output and employment, or when other deflationary concerns appear on horizon, central bank should ease monetary policy by bringing real interest rates below economy's natural rate of interest for some Conversely, central bank should respond to inflationary concerns by adjusting interest rates upward so as to bring real interest rates above natural rate. In this setting, natural rate of unemployment is unemployment rate consistent with stable inflation; natural rate of interest is real interest rate consistent with unemployment being at its natural rate, and therefore with stable inflation. (2) In carrying out this strategy in practice, policymaker would ideally have accurate, quantitative, contemporaneous readings of natural rate of interest and natural rate of unemployment. Under those circumstances, economic stabilization policy would be relatively straightforward. However, an important difficulty complicates policymaking in practice and may limit scope for stabilization policy is policymakers do not know values of these natural rates in real time, is, when they make policy decisions. Indeed, even in hindsight there is considerable uncertainty regarding natural rates of unemployment and interest, and ambiguity about how best to model and estimate natural rates. Milton Friedman, arguing against natural rate-based policies in his presidential address to American Economic Association, posited One problem is [the policymaker] cannot know what `natural' rate is. Unfortunately, we have as yet devised no method to estimate accurately and readily natural rate of either interest or unemployment. And `natural' rate will itself change from time to time. (3) Friedman's comments echo those made decades earlier by John H. Williams and by Gustav Cassel, who wrote of natural rate of interest: The bank cannot know at a certain moment what is equilibrium rate of interest of capital market. (4) Even earlier, Knut Wicksell stressed the natural rate is not fixed or unalterable in magnitude. (5) Recent research using modern statistical techniques to estimate natural rates of unemployment, output, and interest indicates this problem is no less relevant today than it was 35, 75, or 105 years ago. These measurement problems appear particularly acute in presence of structural change, when natural rates may vary unpredictably, subjecting estimates to increased uncertainty. Douglas Staiger, James Stock, and Mark Watson document estimates of a time-varying natural rate of unemployment are very imprecise. (6) Orphanides and Simon van Norden show estimates of related concept of natural rate of output (that is, potential output) are likewise plagued by imprecision. (7) Similarly, Thomas Laubach and John C. Williams document great degree of uncertainty regarding estimates of natural rate of interest. (8) These difficulties have led some observers to discount usefulness of natural rate estimates for policymaking. William Brainard and George Perry conclude that conventional estimates from a NAIRU [nonaccelerating-inflation rate of unemployment] model do not identify full employment range with a degree of accuracy is useful to policymaking. …

This paper estimates the natural real interest rate that is consistent with stable inflation and output at its potential for the euro area and Luxembourg. The natural interest rate provides a benchmark for assessing the monetary policy stance, as policy is contractionary when real interest rates rise above the natural rate and expansionary when real interest rates fall below this level. We follow Laubach and Williams (2003) in using a small backward-looking macroeconomic model to estimate the time-varying natural interest rate as an unobservable variable. For the euro area, our results suggest the natural interest rate has been fairly stable since 1970 and confirm its decline over the last decade. For Luxembourg, our estimate of the natural interest rate is much higher, reflecting higher potential growth. The results suggest that the single monetary policy may have an expansionary impact in recent years, especially in Luxembourg.

On natural interest rate volatility

As has been hinted at on several occasions, an increasing number of economists from the early part of the 20th century onwards attempted to explain cyclical fluctuations in terms of a divergence between the natural and the market rate of interest. This stimulated Robertson to devote an article to an examination of this explanation of the cycle in 1934.1 This chapter begins with a brief historical picture of the distinction that has been made between natural and market rates of interest, it then explores the use made of this distinction by the Swedish and Austrian schools in explaining the cycle, and ends with Robertson’s own views on the natural rate of interest and its role in the cycle.KeywordsMoney SupplyDemand CurveNatural RateFull EmploymentPrice StabilityThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

The concept of the natural or equilibrium rate of interest has attracted a lot of attention from monetary policymakers in recent years. Most attempts to estimate the natural rate use a closed-economy framework. We argue that in the face of greater integration of global product and capital markets, an open economy framework is more appropriate. We provide some initial estimates of the natural rate for the USA and Japan in a two-country framework. Our identifying assumptions include a close relationship between the time-varying natural rate of interest and the low-frequency fluctuations of potential output growth in both the home country and the foreign country. Our results suggest that the natural rates in both countries are mainly determined by their own trend growth rates of potential output. Nevertheless, the other country’s trend growth plays an important role in several specific periods. The gap between the actual real interest rate and our estimated natural rate offers valuable insights into the recent stance of monetary policy in both of these two countries.

The concept of the natural or equilibrium rate of interest has attracted a lot of attention from monetary policymakers in recent years.Most attempts to estimate the natural rate use a closed economy framework.We argue that in the face of greater integration of global product and capital markets, an open economy framework is more appropriate.We provide some initial estimates of the natural rate for the United States and Japan in a two-country framework.Our identifying assumptions include a close relationship between the time-varying natural rate of interest and the low-frequency fluctuations of potential output growth in both the home country and the foreign country.Our results suggest that the natural rates in both countries are mainly determined by their own trend growth rates of potential output.Nevertheless, the other country's trend growth plays an important role in several specific periods.The gap between the actual real interest rate and our estimated natural rate offers valuable insights into the recent stance of monetary policy in both of these two countries.

The notion of a natural real rate of interest, due to Wicksell (Interest and prices. Macmillan, London Translation of 1898 edition, 1936), is widely used in current central bank research. The idea is that there exists a level at which the real interest rate would be compatible with output at its potential level and stationary inflation. Such a concept is of primary concern for monetary policy because it provides a benchmark for the monetary policy stance. This paper applies the method suggested by Laubach and Williams (Rev Econ Stat 85(4):1063–1070, 2003) to jointly estimate the natural real interest rate and the output gap in the euro area using data from 1960 onwards. Our results suggest that the natural real rate of interest has declined gradually over the past 40 years. They also indicate that monetary policy in the euro area was on average stimulative during the 1960s and the 1970s, while it contributed to dampen the output gap and inflation in the 1980s and 1990s.

Natural interest rate: Assessing the stance of India’s monetary policy under uncertainty

The natural rate of interest has attracted only minor empirical attention. The attention that it has attracted has been exclusively with Woodford’s equilibrium rate of interest rather than with Wicksell’s definition of the natural rate of interest as measured by the return on capital. Statistical offices in the US, the UK and Israel publish data for the return to capital. However, most don’t. National income accounting methods for measuring operating surpluses and capital are reviewed. Data from national statistical offices in several countries have been used to construct data on their returns to capital. These data show that ZIP, which was expected to boost investment and reduce the return to capital, failed to do so. Under the New Abnormal, a major disconnect between the natural and money rates of interest has emerged. There is an elephant in the room, which Neo-Wicksellians have ironically failed to notice.

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.

Recent theoretical developments and practical monetary policy concerns have revived interest on the concept of a “natural” equilibrium real interest rate. The natural real interest rate is potentially an important concept for monetary policy makers. The observable market real interest rate and the natural real rate may deviate and the resulting gap can be used to evaluate the stance of monetary policy. A number of diverse empirical approximations to the natural rate exist causing a great deal of uncertainty about its value and concern about its applicability among central bankers. In this paper, we first examine the notion of the natural rate in view of the different interpretations that have been attached to the — unobservable — natural real interest rate and we summarize and critically evaluate the existing approaches for quantifying it. We then use a dynamic stochastic general equilibrium framework to obtain a theory-based measure of the natural interest rate in the US that is time varying.

The natural rate of interest is the real interest rate that would prevail when the macro economy is in its natural, long-term equilibrium at which the actual GDP growth rate equals its potential rate. The natural rate of interest should therefore comove with the long-term trend of the potential GDP growth. In addition, since monetary policy authority has a significant impact on real interest rates, the difference between real and natural interest rates can be the basis for determining the long-term policy stance for the real sector of the economy. This study estimates potential growth rates and natural interest rates in Korea and the United States based on the Holston et al. (2017) model with important adjustments. We use the real market interest rate faced by economic agents, which may be different from the traditional real rate computed using the policy rate. Also, GDP per capita is considered, which is theoretically more suitable when population growth is taken into account. The estimation results using these new measures and the associated adjustment in the model reveal that the estimated natural rate of interest captures the theoretical characteristics of the natural interest rate better than the estimate using standard real interest rate. In addition, since the 2000s, Korea's real rate was much lower than the estimated natural interest rate, suggesting that the long-term monetary policy stance in Korea might have been strongly accommodating.

In many economies, the monetary policy instrument is the level of short-term nominal interest rates, but the monetary policy stance might be better characterised by the ex-ante real interest rate that this nominal rate implies, relative to some 'neutral' or 'natural' real rate of interest. In this paper, the natural rate of interest and the real interest rate gap - the difference between the actual and the natural real rate of interest - are estimated by applying Kalman filtering techniques to a small-scale macroeconomic model of the UK economy. In this model, the real interest rate gap, the output gap and inflation are related via IS-curve and Phillips-curve relationships. The natural rate of interest is defined as the level of (ex-ante) real interest rates that is consistent with an output gap of zero, that is output at its natural level, in the medium term. Based on these estimates, the paper examines whether empirical measures of the real interest rate gap are a useful tool for policymakers - do they contain additional information relative to the estimated output gap, and does the real rate gap have leading indicator properties for the output gap and inflation? Are these gap estimates of practical use in a policy setting? The paper finds that the real rate gap has leading indicator properties for both the output gap and inflation. Importantly, these properties have varied considerably over time: breaking the sample into four subsamples, it appears that the leading indicator properties for both the output and real rate gap were substantially stronger for the subsample that covers most of the 1980s. After the introduction of the inflation target, post 1992, the relationship between the real interest rate gap and the output gap strengthens, but the leading indicator properties of these gaps for inflation diminish, as might be expected under an inflation-targeting regime.

China's financial market has undergone significant changes since financial deleveraging commenced and regulatory supervision was tightened in 2017. Intensifying China–US trade tensions have further increased the uncertainties of external environments. In this article, we use a Bayesian approach instead of the standard maximum likelihood estimation in the Laubach–Williams model to estimate the natural interest rate by considering financial factors and open conditions, and analyze the relationships among the natural interest rate, economic activities and monetary policies. We find that technological and demographic factors are the main drivers of natural interest rates, while financial factors and open conditions also play important roles. In particular, shocks in the financial markets and the external economic environment in recent years are important reasons for the decline of China's natural interest rate. Therefore, it is necessary to strengthen research on the estimation of the natural interest rate to ensure China's transformation into more price‐based monetary policy and high‐quality development.

A wicksellian indicator of monetary policy