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Cambridge Journal of Economics Advance Access published online on October 4, 2007
Cambridge Journal of Economics, doi:10.1093/cje/bem018
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© The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

How useful is the concept of the natural real rate of interest for monetary policy?

Axel A. Weber, Wolfgang Lemke and Andreas Worms*

* Deutsche Bundesbank. This paper is based on the Inaugural G.L.S. Shackle Biennial Memorial Lecture 2006 given by Axel A. Weber at St Edmund's College, the University of Cambridge, on Thursday, 9 March 2006. The paper presents the authors' personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank or the Eurosystem

Address for correspondence: Andreas Worms, Deutsche Bundesbank, Economics Department, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany; email: andreas.worms{at}bundesbank.de

The natural rate of interest plays a key role in Wicksell's ‘cumulative process’ as well as in modern monetary equilibrium models of the business cycle. It constitutes a useful concept for the theoretical analysis of the interdependence of monetary policy and economic fluctuations. However, the usefulness of this concept for the practice of monetary policy is limited—especially owing to the fact that the natural real rate of interest and its law of motion cannot be measured with satisfying precision.

Key Words: Natural real rate of interest • Monetary policy • Wicksell

JEL classifications: E31, E32, E52

Manuscript received April 24, 2006; final version received March 5, 2007.


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