John Williams
Neutral Rate of Interest
27/09/2017
You can find more detail Mr. Williams
speech from this link.
Mr. Williams answered this question :
"Is the longer-term natural interest rate a constant ?"
The economy’s growing faster and productivity growth is faster in the ‘new economy’, it means the neutral interest rate should be higher. It was around 2011 that I noticed this downshift in the natural rate of interest had occurred in our estimates, and had stayed at these low levels, as opposed to moving back to more normal levels. Economists are consistently finding is evidence that the natural or equilibrium interest rate is much lower than we believed, say, in the 1990s, or even before the crisis.
Mr. Williams answered this question : What is the main factor that is driving longer-term natural interest rate ?
1-Trend growth rate of the economy
a- Productivity growth
slowing
b- Slower labour force
growth
2-Supply /Demand for Saving/Investment
Mr. Williams didn’t include that (Factors in 2) in his model originally. But roughly half is slower growth, and half is other things to do with saving and investment beyond the slower growth.
Mr. Williams has interesting ideas about
tech innovation.
The bigger story is that a lot of the innovation in terms of new ideas and products is often consumer-focused. That’s in contrast to the 1990s, early 2000s, when a lot of the innovation was really business either buying or taking advantage of more computing power.
Today, first of all, the US doesn’t make many computers. A lot of these physical computers are made abroad, so that affects some of this. A lot of the newer apps and so on are oriented to the consumer, which may not have a knock-on effect of faster productivity growth in GDP. People take advantage of apps in terms of in finding what restaurant to go to and getting a car to drive you from point A to point B. But that’s probably an improvement in our leisure time, and probably doesn’t show up in GDP.
Perfect phrase
If you just use computers to do the same thing you’ve always done, you get a little bump in productivity. When you totally change how you do things, that’s when you get the bigger shift.
Why unconventional monetary will be normal in the future ?
The key implication is the likelihood of more unconventional monetary policy due to low normal interest rates. On average during normal economic conditions when inflation is 2% would that would be 2.5–3.0%. My own view is about 2.5%, so 0.5 percentage point is the real interest rate plus 2 percentage points of inflation. That is low. And, if historically the Fed usually cuts interest rates by 4–5 percentage points during typical recessions, that is no longer possible if you are starting at 2.5–3.0%. So unconventional policy becomes conventional. Quantitative easing, forward guidance or some way of committing to keep interest rates low for a long time become more normal policy.
You have said the US economy has “fully
recovered” from recession. Are you concerned that heightened levels of
leverage (encouraged by low rates) and a reliance on asset price appreciation (partly
a result of central bank asset purchases) are the real driving force behind
economic growth?
I fully support that because if we kept interest rates too low for too
long, we would be fuelling the further growth via unsustainable factors
like asset price bubbles or other activity that involves trying to have the
economy grow beyond a sustainable pace, and eventually, it’s going to bite
you. But I don’t think we’re at that place now. Growth is running around
2%, plus or minus. Job growth is still very strong, unemployment continues to
be very low.
Dr. Engin YILMAZ
02.10.2017
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