Mike Goldby, Lien Laureys and Kate Reinold.
The natural rate of interest is usually defined as the one prevailing when economic activity is at potential and inflation is low and stable. As this has a very similar flavour to the monetary policy objective of many central banks, it is interesting to policymakers. The natural rate is unobservable and needs to be estimated. In this post, we show an estimate derived from a standard macroeconomic model which suggests that the (real) natural rate fell very sharply during the financial crisis, perhaps to as low as -6%, and that, despite a marked recovery since 2012, it remains around zero. Continue reading “An estimate of the UK’s natural rate of interest”