The natural rate of interest – a useful but uncertain indicator for the economy

Abstract

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.