Working Paper: NBER ID: w26262
Authors: Scar Jord; Alan M. Taylor
Abstract: Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country’s rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control.
Keywords: Monetary Policy; Interest Rates; Natural Rate of Interest; Global Trends
JEL Codes: E43; E44; E52; E58; F36; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank policy (E52) | Interest rates (E43) |
| Productivity growth (O49) | Interest rates (E43) |
| Demographic changes (J11) | Interest rates (E43) |
| Monetary policy (E52) | Output gap (E23) |
| Output gap (E23) | Monetary policy (E52) |
| Local natural rate > World average (F29) | Higher output relative to potential (E23) |