Monetary Policy, the Financial Cycle, and Ultra-Low Interest Rates
Mikael Juseliusa, Claudio Boriob, Piti Disyatatc, and Mathias Drehmannb
Do the prevailing unusually and persistently low real interest
rates reflect a decline in the natural rate of interest as commonly
thought? We argue that this is only part of the story.
The critical role of financial factors in influencing mediumterm
economic fluctuations must also be taken into account.
Doing so for the United States yields estimates of the natural
rate that are higher and, at least since 2000, decline by
less. An illustrative counterfactual experiment suggests that
a monetary policy rule that takes financial developments systematically
into account during both good and bad times could
help dampen the financial cycle, leading to significant output
gains and little change in inflation.
JEL Codes: E32, E40, E44, E50, E52.
Full article (PDF, 36 pages, 797 kb)
Discussion by Marc P. Giannoni
a Bank of Finland
b Bank for International Settlements
c Bank of Thailand