The negative natural rate of interest in the modern theories of Liquidity Trap and Secular Stagnation: back to Böhm-Bawerk via Samuelson

Abstract

The negative natural rate of interest is since two decades eliciting theoretical and policy debates. It re-emerged, after a relatively long time, in Krugman’s Liquidity Trap model. Later, it was placed at the hearth of the Secular Stagnation theory by Summers. It is argued that Krugman’s negative natural rate of interest ensues from theoretical premises analogous to those present in Samuelson’s overlapping-generations model. In turn, Samuelson obtained a negative equilibrium interest rate by opportunely recasting Böhm-Bawerk’s three causes for a positive rate of interest. The present paper illustrates and analyses this line of thought until its recent developments.