The Natural Rate of Interest and the Financial Cycle

Category: Money and Macro Brown Bag Seminar
When: 16 February 2017
, 12:00
 - 13:00
Where: HoF 1.27 Dubai
Speaker: Georgi Krustev (Goethe University Frankfurt / ECB)

I extend the model of Laubach and Williams (2003) by introducing an explicit role for the financial cycle in the joint estimation of the natural rates of interest, unemployment and output, and the sustainable growth rate of the US economy. I find that the conventional natural rate of interest (the one consistent with price stability) may diverge substantially from a finance-neutral natural rate, intended as the interest rate consistent with a balanced financial cycle (i.e. financial stability). Therefore, the absence of “divine coincidence” highlights the challenges and trade-offs in achieving at the same time price and financial stability with a single monetary policy instrument.