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Natural Interest Rate and Money Interest Rates

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Published/Copyright: November 10, 2020
The Economists’ Voice
From the journal The Economists’ Voice Volume 18 Issue 1

Abstract

The long lasting period of declining interest rates raises the question, whether the latter result from a savings glut, from a money glut, or from both. Moreover, it renewed the old question how the natural interest rate should be sensibly defined, and if it could ever fall below the growth rate, thereby causing dynamic inefficiency. The present article contributes to this debate on a pure theoretical base, leaving the empirical issue for other research. In particular, I briefly discuss Böhm-Bawerk’s three causes for the existence of an interest rate in a private barter economy. I argue that the natural interest rate remains a meaningful concept even in an economy with both a public sector and money. From a welfare economic view, it is also preferable above the so-called golden rule, provided the interest rate does not fall below the growth rate. Although the natural interest rate could well get negative by excess saving in principle, this is normally prevented when durable goods like land or precious metals are available for storing private wealth. On the other hand, issuing credit money tends to push the interest rate below its natural level, even in the long run. In order to prevent this, one could either replace it by neutral helicopter money or return to a gold currency.

Keywords: credit money; dynamic inefficiency; helicopter money; golden rule; negative interest
Corresponding author: Ulrich van Suntum, Center for Applied Research in Economics Münster (CAWM), University of Münster, Am Stadtgraben 9, 48149, Munster, Germany, E-mail:

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Received: 2019-09-12
Revised: 2020-04-30
Accepted: 2020-10-12
Published Online: 2020-11-10

© 2020 Walter de Gruyter GmbH, Berlin/Boston

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https://doi.org/10.1515/ev-2019-0028
Keywords for this article
credit money; dynamic inefficiency; helicopter money; golden rule; negative interest

Articles in the same Issue

  1. Editorial
  2. Challenges for Monetary and Fiscal Policy in a Post-Covid-19 Order
  3. Policy Papers: Challenges for Monetary and Fiscal Policy
  4. The ECB Under the Threat of Fiscal Dominance – The Individual Central Banker Dimension
  5. Monetary Policy and Asset Price Gap Signal Technology in a New Keynesian Framework
  6. Natural Interest Rate and Money Interest Rates
  7. Eurobonds: Three Lessons from China’s “Debt Centralization/Decentralization” Experience
  8. Determinants of Japanese Household Saving Behavior in the Low-Interest Rate Environment
  9. Policy Forum: Post-Corona Order
  10. Joe Biden: A Bearer of Hope
  11. Sustainability of the Bank of Japan’s ETF Purchasing Policy
  12. Serendipity or a Missed Chance? On the Interaction Between Vaccine Distribution and the EU Recovery Funds
  13. Conceptualizing the Cost of COVID Policy: The Role of Institutional Trade-Offs
  14. Taliban Soft or Hard Makes No Difference
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