September 2017 issue contents
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