Accommodating monetary policy
Figure 3 Major factors contributing to declining neutral rates Going forward, the number of double-income households is expected to rise, possibly contributing to a higher saving rate.
Meanwhile, factors affecting sluggish domestic investment include the outlook of a shrinking market for durable goods, a shift in production locations to overseas and growing offshoring, and a change in economic structure toward services.
For example, Laubach and Williams (2013, 2016) estimated that, in the US, the natural rate of interest dropped from around 3% in 2000 to around 0% in 2011–2017. (2016) applied the same approach and estimated that, in the Eurozone, the natural rate of interest dropped from around 2.5% in 2000 to -0.5 in 2012–2016.
Using the same approach, the Bank of Japan showed that, in Japan, the neutral rate fluctuated around 0% from 2000–2016 (Fujiwara et al. Compared with the Federal Reserve and ECB, the Bank of Japan put more emphasis on the ‘natural yield curve’ as an extension of the conventional natural rate of interest at various maturities – rather than the natural rate of interest (which refers to short maturity).
This reflects their concern about declining potential economic growth (and the natural rate of interest) as well as weaker-than-expected inflation performance.
The evidence suggests that this policy has had mixed success at best, and that the natural rate of interest may decline in the foreseeable future.
On a quarter-to-quarter basis, economic growth in Japan was 0.6% in the second quarter of 2017, compared with 0.3% in the first quarter; in the US the equivalent figures were 0.75% compared with 0.3%; and in the Eurozone, 0.6% compared with 0.5%.
These economic growth rates have been well above their respective potential economic growth rates.
Regarding related interest rate issues, central banks and academics tend to focus on the following three issues: These issues are all essentially related to movements in the natural rate of interest.
The natural rate of interest refers to the real interest rate that equalises savings and investment in the steady state, or the equilibrium interest rate that neither accelerates nor decelerates economic activities and inflation.
Search for accommodating monetary policy:
Interest rates in many advanced economies have been declining since the 1990s.