Investment in artificial intelligence, increased government borrowing, de-globalization, and other factors could in coming years push up the neutral rate of interest that guides both monetary and fiscal policy, suggests a paper to be discussed at the Brookings Papers on Economic Activity (BPEA) conference on September 25.
The paper, by Lukasz Rachel of University College London, uses a macroeconomic model of supply and demand for savings and wealth to consider where the natural (or neutral) rate, known as r*, is headed over the longer term in advanced economies such as the United States, Germany, France, the United Kingdom, Canada, and Japan.
The natural rate is the real interest rate (the nominal interest rate minus inflation) that prevails over the medium-to-long term when the supply of savings, or capital, from households is in balance with the demand for funds by businesses…
