The conventional versus the natural rate of interest: implications for central bank autonomy

Abstract

The analysis of the "natural rate of interest" fills one of the most important and controversial chapters in the history of economic thought. It continues to be a highly topical subject in modern macroeconomics because it is the keystone of the new monetary policy. On classical and Post Keynesian grounds, this paper considers that the "money" rate of interest rate is a (re)distributive variable. At any moment we can refer to the "conventional" rate of interest, on which economic agents base their investments in real and financial assets. But this rate lacks the necessary conditions to be called "natural." There is no gravity center for market interest rates. Neither the general rate of profit nor the potential or warranted rate of growth can make a claim to this role. A unique relationship between the rates of interest and inflation, as suggested by Wicksell and the new macroeconomic consensus, does not exist. Given this, the ability of monetary authorities to influence the market interest rate, both in the short and the long run, is enhanced.

Keywords:

• conventional rate of interest
• hysteresis
• NAIRI
• NAIRU
• natural rate of interest
• natural rate of unemployment
• path-dependent variables