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R-star decline and monetary hysteresis

Author(s): Phurichai Rungcharoenkitkul

Date published: Mar 2020

SUERF Policy Note, Issue No 137
by Phurichai Rungcharoenkitkul, Bank for International Settlements

JEL-codes: E40, E43, E52, E58.
Keywords: Natural interest rate, monetary policy, monetary hysteresis.

Why are global real interest rates so low for so long? Conventional theory appeals to structural factors that push down the ‘natural interest rates’ or r-star. We subject this view to a direct empirical test, by examining if real factors such as productivity growth and demographic shifts can explain real interest rate movements. Our findings, based on 19 countries over 145 years, cast doubt on this view, instead pointing to the overlooked role of monetary factors. We propose a new theoretical explanation of persistently low real rates, grounded on the interaction between monetary policy and the financial boom-bust cycle. From this ‘monetary hysteresis’ perspective, low real rates could arise endogenously from successive failures to stabilise the financial cycle.
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SUERF Policy Note, Issue No 137SUERF Policy Note, Issue No 137

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