Browsing by Subject "natural rate of interest"

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  • Vilmi, Lauri (2016)
    Bank of Finland. Bulletin 4/2016
    The natural rate of interest is the real interest rate that brings the economy into equilibrium and would prevail if the output of the economy were at its potential level, i.e. in a situation where the economy is neither in an upswing nor in a downswing. The equilibrium would lead to stable inflation over the long term. During the last 10 years, the natural rate of interest in the advanced economies is estimated to have declined substantially. This not only affects the assessment of current monetary policy but also the future challenges facing monetary policy. However, estimates of the level of the natural rate of interest are very uncertain, which hampers the use of this interest rate as a monetary policy guide.
  • Vilmi, Lauri (2017)
    BoF Economics Review 1/2017
    We estimate the long-term natural rate of interest for the euro area with two specifications of a simple semi-structural macroeconomic model. The estimates provide competing interpretations for the euro area’s current economic environment of weak growth, subdued inflation and exceptionally low nominal interest rates. In our first estimation, the current state of economy is attributed to persistent, recurring negative shocks to the output gap that restrain growth even when expansionary monetary policies are applied. The second estimation suggests that a large drop in the natural rate of interest is the problem, because, even with interest rates held close to zero, policy actions have not been able to revive the economy after major shocks in 2008, 2012 and 2016. As both views may explain some of the observed trends, the task of teasing out the drivers of current conditions and future trends is non-trivial. Nevertheless, policymakers should pay attention to both stories as they have quite different endings.