Skip to main content

On the return of the natural rate of interest

The natural rate is an old concept, well explained in Wicksell, that almost vanished (Keynes was explicitly against it, even though he partially failed to get rid of it), and has made a come back with the Neo-Wicksellian model that dominates macro today (misnamed New Keynesianism). Below the estimates published in the speech by John Williams.

Note that what seems to drive the natural rate of interest is the basic rate determined by the central bank. Either the fall of the natural rate caused the crisis, or more plausibly, the crisis forced the central banks to reduce the basic rates, and the average of the fed funds rate (which is essentially how they get the natural rate) has subsequently fallen. The same goes for the twin concept of the natural rate of unemployment that keeps falling.

Interesting thing is that for a while the very concept had lost some of its prominence. After the Keynesian Revolution, and particularly after the capital debates, mainstream economists were more cautious about bringing up the natural rate of interest. Friedman used a subterfuge to bring it back with the idea of the natural rate of unemployment. In part because of that, as it can be seen below, the use of the term natural rate of interest in four of the central mainstream journals (American Economic Review, Economic Journal, Journal of Political Economy and Quarterly Journal of Economics) fell in the 1970s, 80s and 90s.


Since the 2000s, there seems to be an increase in the use of the term (in my JSTOR search; note we have a few more years left in the last decade), and if Ngram viewer is correct, a decline in the use of natural rate of unemployment (although the increase in natural rate of interest is not visible in Ngram; one was a limited search in academic journals and the other is a very broad search in books, which may explain the different results). I might be wrong, but my guess is that the natural rate of interest, now that the capital debates are long forgotten, is being rehabilitated.

PS: First paper in 1913 by Irving Fisher, in the JSTOR search.  Roy Harrod is the one with the most papers using the term natural rate of interest, followed by Dennis Robertson. In recent times the one with more papers is Michael Woodford. I excluded papers that were about history of thought, rather than about theory (very few anyway).

Comments

Popular posts from this blog

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…

What is the 'Classical Dichotomy'?