The Natural Rate of Interest is Zero – hosted by the Ofer Abarbanel online library (text)

The Natural Rate of Interest is Zero

by Warren Mosler*
and Mathew Forstater**
Working Paper No. 37 December 2004
*University of Cambridge **University of Missouri – Kansas City

THE NATURAL RATE OF INTEREST IS ZERO
Warren Mosler, Cambridge University, and Mathew Forstater, UMKC

The notion of “natural” (or “normal”) values and magnitudes is a recurring theme in the history of economics. It was central to the Classical Political Economy of Adam Smith and David Ricardo, and survived the transition to neoclassical economics in the work of authors such as Wicksell and Marshall. In modern economics, it has its most familiar usage in the notion of a natural rate of unemployment, but has been applied also to the analysis of economic growth rates and interest rates, among others. And while many economists reject the very notion of “natural” itself, this paper argues that in general there are significant instances in which natural magnitudes do apply to the economic system, and, specifically, that the natural, nominal, risk free rate of interest is zero under relevant contemporary institutional arrangements. Continue reading “The Natural Rate of Interest is Zero – hosted by the Ofer Abarbanel online library (text)”

Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging – hosted by Ofer Abarbanel online library

American Economic Review 2017, 107(11): 3550–3588 https://doi.org/10.1257/aer.20141313

Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging†
By Marco Di Maggio, Amir Kermani, Benjamin J. Keys, Tomasz Piskorski, Rodney Ramcharan, Amit Seru, and Vincent Yao*

Exploiting variation in the timing of resets of adjustable-rate mortgages ARMs , we find that a sizable decline in mortgage payments up to 50 percent induces a significant increase in car purchases up to 35 percent . This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car pur- chases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through. Continue reading “Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging – hosted by Ofer Abarbanel online library”