Federal Reserve Bank of Atlanta

10/17/2024 | Press release | Distributed by Public on 10/17/2024 10:08

An International Approach to the Neutral Interest Rate

  • Andrés Blanco
    Federal Reserve Bank of Atlanta

Full text

Summary:

Following the COVID-19 recession, the US net international investment position, which is negative, declined to nearly 90 percent of national income. This decline coincided with an increase in long-term yields and a steady drop in net investment income. Increasing net savings is necessary to meet the US long-run budget constraint, suggesting that higher interest rates are needed to boost the net savings of US households and firms.

Key findings:

  1. The neutral interest rate is the specific rate that balances the demand and supply of goods and services without causing inflation to rise or fall.
  2. In an open economy, a debtor country must generate positive net savings in the future to meet debt obligations. An increase in the neutral interest rate is necessary to encourage households and firms to save more.
  3. This Policy Hub paper highlights the importance of the US net international investment position in determining the neutral interest rate.

Center Affiliation: Center for Financial Innovation and Stability

JEL classification: E24

Key words: neutral interest rate, current account, net saving rate

https://doi.org/10.29338/ph2024-07

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