What Anchors for the Natural Rate of Interest?

54 Pages Posted: 1 Apr 2019

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Piti Disyatat

Puey Ungphakorn Institute for Economic Research, Bank of Thailand

Phurichai Rungcharoenkitkul

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 26, 2019

Abstract

The paper takes a critical look at the conceptual and empirical underpinnings of prevailing explanations for 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. Far from being neutral, the policy regime 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: Real Interest Rate, Natural Interest Rate, Saving, Investment, Inflation, Monetary Policy, Safe Asset Shortage Hypothesis

JEL Classification: E32, E40, E44, E50, E52

Suggested Citation

Borio, Claudio E.V. and Disyatat, Piti and Rungcharoenkitkul, Phurichai, What Anchors for the Natural Rate of Interest? (March 26, 2019). BIS Working Paper No. 777, Available at SSRN: https://ssrn.com/abstract=3361404

Claudio E.V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Piti Disyatat

Puey Ungphakorn Institute for Economic Research, Bank of Thailand ( email )

273 Samsen Road
Bangkhunphrom, Bangkok 10200
Thailand

Phurichai Rungcharoenkitkul (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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