The Natural Rate of Interest Is Zero
This paper argues that the natural, nominal, risk free rate of interest is zero under relevant contemporary institutional arrangements. However, as Spencer Pack reminded us, “[n]atural and nature are complex words, fraught with ambiguity and contradiction” (1995, 31). The sense in which we wish to employ the term natural here does not imply a “law of nature,” which may be why “[Alfred] Marshall replaced the evocative label ‘natural’ with the more prosaic ‘normal’” (Eatwell 1987, 598). Marshall may have clarified it the best when he wrote that “normal results are those which may be expected as the outcome of those tendencies which the context suggests” ([1920] 1966), 28, emphasis added). In this case, it is of the utmost importance to first clarify the context, to which we now turn.