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I have a new post at Econlog on the natural rate of interest. Here I’d like to suggest that it might be lower than many people assume. Here’s the rate of NGDP growth from 1947 to 1965:

And here is the yield on T-bills during that period:

Notice that NGDP growth averaged around 6% during the first few postwar decades, and T-bill yields averaged around 2% or 3%.

Today the Fed is implicitly targeting NGDP growth at 3%. (They still think it’s about 4%, but they’ll figure it out eventually.) If trend NGDP growth is now about 3% lower than during the postwar period, you might expect the natural interest rate to also be significantly lower, indeed close to zero.

Of course if you used more recent periods then the results would be a bit different. My point is that there isn’t really anything unprecedented about the current low level of rates. We’ve seen interest rates at a level 3 percentage points below trend NGDP growth before, so there’s no saying it can’t happen again. I still expect interest rates to rise next year, as does the market, but hopefully this exercise will give you a sense of why both the market and I are pessimistic about the Fed’s ability to drive rates much higher by 2018.

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This entry was posted on November 02nd, 2015 and is filed under Misc.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



