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