Business Economics

, Volume 50, Issue 2, pp 57–60

The Decline in the Natural Rate of Interest

  • John C Williams
Original Article

Abstract

With the Federal Reserve widely expected to begin normalization of monetary policy in the wake of the Great Recession—perhaps in 2015—an important question for public policy and private-sector planning is what the “new normal” for interest rates is likely to be. In particular, are real interest rates likely to be lower in the future than in recent decades? An investigation through the use of the Kalman filter shows that the natural rate of interest—the real federal funds rate consistent with the economy operating at its full potential—has declined since 1980, especially after the Great Recession. This will have important implications for monetary policy and for the private sector, including recognition that the natural rate of interest is not fixed.

Keywords

natural rate of interest real interest rate monetary policy Kalman filter 

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Copyright information

© National Association for Business Economics 2015

Authors and Affiliations

  • John C Williams

There are no affiliations available

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