The "natural rate of interest" is an analytical concept which is embedded in mainstream approaches to economics. Modern Dynamic Stochastic General Equilibrium (DSGE) models are built around the importance of interest rate (including expected interest rates) and the central bank's setting of those rates. If you are willing to assume that mainstream macro is correct, it provides a way of looking at the world. For example, "secular stagnation" (slow growth) can be blamed upon the natural real rate of interest falling to a negative value, leaving central banks unable to stimulate the economy.
However, if you are less willing to assume that mainstream macro is correct, and would like to test the efficacy of interest rates for steering the economy, you will run into a severe problem. The way that the natural rate of interest is currently conceptualised means that it can explain any observed economic outcome; that is, it is non-falsifiable. As a result, there is no point in trying to prove modern mainstream macro as being incorrect; that task is impossible. The only way forward is to ask whether modern macro can make an useful predictions (as opposed to fitting historical data); I would argue that there is little sign of any such predictive power.…Bond Economics
The Non-Falsifiability Of The Natural Rate Of Interest
Brian Romanchuk
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