The Natural Rate of Interest, Trends and Applications to Forensic Economics

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Peter Formuzis and Barry Ben-Zion. 2022. The Natural Rate of Interest, Trends and Applications to Forensic Economics. Journal of Legal Economics 28(1): pp. 47–74.

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The natural rate of interest, sometimes referred to as the neutral rate, or R*, is the real rate of interest consistent with real output equal to its potential and with stable inflation. This paper provides a brief history of the development of R* from a purely theoretical concept and into the applied fields of monetary, financial, and forensic economics. The paper summarizes the state of the literature regarding the measurement of R* from 1960 to 2020 and shows its secular downward trend from 4.0% to 2.0% prior to the 2008-09 financial crisis, and its collapse thereafter to rates generally estimated below 1.0%. Causes for the secular decline are several and are classified into whether they produce an increase in the supply of saving or reduce the demand for investment. The factors identified as the principal causes for the secular decline in real and natural rates are generally thought to be of more permanent than transitory in nature and not easily reversible. The prevailing view is that the foreseeable future will likely be an environment of low real and natural rates of interest. The R* literature has important implications for forensic economists, whether they employ the net discount or the gross discount rate methodology.

Authors

Barry Ben-Zion, Peter Formuzis

Publication Year

2022