Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Calculating the "Natural Rate of Interest"

rated by 0 users
This post has 6 Replies | 4 Followers

Not Ranked
Posts 14
Points 325
phillidor Posted: Wed, Nov 7 2007 12:06 AM

I am working on a college project to study the Austrian Business Cycle Theory.

I would like to find a good way to estimate the "Natural Rate of Interest" - the rate of interest that the market would have produced based solely on consumers' time preference.

An attempt at determining such a figure was "the 3-month lagged difference between consumer and producer prices" (Sechrest, 2003) 

This gets into another difficulty. The U.S., being an open economy, has capital flows. It seems that any attempt at producing a "natural rate of interest" have to account for various time preferences around the world.

Does anyone have suggestions to estimate such a figure?

"Thanks" to all that try to help!

  • | Post Points: 50
Top 500 Contributor
Posts 251
Points 4,510

 Wow, I'm not sure this is really possible. Monetary tinkering not only alters the natural rate of interest, but can also have an effect on people's time preference itself. In other words, if the supply of money changes, the relationship between spending and investing can change also.  Trying to ascertain in absolute terms where these numbers would lie, absent government intervention, is not really within the scope of economics, at least not Austrian Economics. One can only say in what direction things will go, not by how much or when.

  • | Post Points: 20
Top 75 Contributor
Posts 1,175
Points 17,905

That was my thought too - just how does one even begin such a task? So many factors influence the interest rate, many of which are not pure market phenomena. 


  • | Post Points: 5
Top 50 Contributor
Posts 1,687
Points 22,990
Bogart replied on Wed, Nov 7 2007 5:44 PM

Keep in mind that you really want the value of the "real interest rate" in the future and not the present.  That is not known.  Interest rates (Cost of money) like any good is based on consumer preferences that are so complex that no computer, or person, or person and compute, or group of persons and group of computers could determine it with any accuracy.

 Instead we have a Federal Reserve who computes or DIVINES the interest rates in an effort to reward their friends and screw the rest of us, especially the poorest among us.

 The problem of the Federal Reserve here is that the economy(Those millions of persons with their individual preferences) reacts to the Fed mischeif and thus  makes it impossible to extract out the effect of the Fed from the effects of those reacting to the Fed OR WORSE those folks in the economy reacting to what they think the Fed will do based on what is happening.

  • | Post Points: 20
Not Ranked
Posts 6
Points 45

well, there is no future. You are right there in the moment. So building a model is simple enough. The question is is the model representative of reality. Models even the ones the Fed uses are not 100% accurate and they dont need to be, they simply need to meet the criteria for accuracy. so build away.

  • | Post Points: 5
Not Ranked
Posts 11
Points 235
Calvin replied on Sat, Nov 24 2007 7:42 PM

The natural rate of interest is derived from the availability of loanable funds from savings.   Do I have this right?    

  • | Post Points: 20
Not Ranked
Posts 6
Points 45


  • | Post Points: 5
Page 1 of 1 (7 items) | RSS