I comment on Josh Hendrickson's interesting post. While it certainly is hard for me to believe that the natural rate of interest could be negative, it's difficult to find a satisfying alternative explanation for the sustained output gap of the past seven years coexisting with the federal funds rate at the zero lower bound plus positive inflation.

 

One Response to Can the natural rate of interest be negative?

  1. @HPublius says:

    You ask whether agents can value the future more than the present (in other words, can time preferences and the natural rate be negative?). Of course they can, but you need to start by redefining time preferences. Time Preference is not an exogenous input into the Euler Equation of consumption. As the utility of consumption is a function of incomes, time preference is endogenously determined by income expectations. When agents expect negative income growth, consumption in the Future becomes more valuable than consumption the present hence you get negative time preferences. In other words, savings money for a rainy day.

    As to what happens at ZLB, you may find this post interesting:

    http://tinyurl.com/oulszvp

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