Monetary Policy, the Financial Cycle, and Ultra-Low Interest Rates

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Title: Monetary Policy, the Financial Cycle, and Ultra-Low Interest Rates
Author: Juselius,Mikael ; Borio, Claudio ; Disyatat, Piti ; Drehmann, Mathias
Series: International Journal of Central Banking
Series volume: 13
Series number: 4 ; September
Year of publication: 2017
Publication date: 15.9.2017
Published in: Published also in Bank of Finland Research Discussion Papers 24/2016.
Pages: 55-89
Subject (yso): rahapolitiikka; luotot; korko; suhdannevaihtelu
Keywords: luonnollinen korkotaso; rahoitussyklit; suhdannejaksot
JEL: E32; E40; E44; E50; E52
Other keywords: natural interest rate; financial cycle; monetary policy; business cycle; credit
Abstract: Do the prevailing unusually and persistently low real interest rates reflect a decline in the natural rate of interest as commonly thought? We argue that this is only part of the story. The critical role of financial factors in influencing mediumterm economic fluctuations must also be taken into account. Doing so for the United States yields estimates of the natural rate that are higher and, at least since 2000, decline by less. An illustrative counterfactual experiment suggests that a monetary policy rule that takes financial developments systematically into account during both good and bad times could help dampen the financial cycle, leading to significant output gains and little change in inflation.

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