Economics Dictionary of ArgumentsHome
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| Natural rate of interest: The natural rate of interest is the theoretical real interest rate at which an economy operates at full employment with stable inflation. It balances saving and investment without causing economic overheating or recession. This rate is influenced by factors like productivity, demographics, and global economic conditions, and it serves as a benchmark for monetary policy. See also Rate of Interest._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Natural Rate of Interest - Dictionary of Arguments
Rothbard III 440 Def Natural Rate of Interest/Rothbard: In many cases it is convenient to designate by different terms the rate of interest on contractual loan markets and the rate of interest in the form of earnings on investments as a result of price spreads. The former we may call the contractual rate of interest (where the interest is fixed at the time of making the contract), and the latter the natural rate of interest (i.e., the interest comes “naturally” via investments in production processes, rather than being officially included in an exchange contract). Rothbard III 445 Producer’s loans: A difficulty seems to arise, however, in the case of long-term producers’ loans. Here is an apparently clear-cut rigid element in the system, and one which can conform to the natural rate of interest in investments only after a great lag. Rothbard III 449 The absurdity of separating the long-run and the short-run interest rates becomes evident when we realize that the basic interest rate is the natural rate of interest on investments, not interest on the producers’ loan market. >Interest rate/Rothbard, >Loans/Rothbard, >Credit/Rothbard, >Production/Rothbard, >Investments/Rothbard. Rothbard III 794 Natural rate of interest/Rothbard: Let us consider the interest rate in terms of natural interest. Then, suppose 100 ounces are paid for factors that will be transformed in one year into a product that sells for 105 gold ounces, for an interest gain of five and an interest return of 5 percent. Now a general expectation arises of a general halving of prices one year from now. The selling price of the product will be 53 ounces in a year's time. What happens now? Will entrepreneurs buy factors for 100 and sell at 53 merely because their real interest rate is preserved? Certainly not. They will do so only if they do not at all anticipate the change in purchasing power. But to the extent that it is anticipated, they will hold money rather than buy factors. This will immediately Iower factor prices to their expected future levels, say from 100 to 50. Cf. >Market interest rate/Fisher. Loan rate/Rothbard: What happens to the Ioan rate is analytically quite trivial. It is simply a reflection of the natural rate and depends on how the expectations and judgment of the people on the Ioan market compare with those on the stock and other markets. >Loans/Rothbard. Free market/Rothbard: For the free economy, there is no point in separately analyzing the Ioan market. Analysis of the Fisher problem - the relation of the interest rate to price changes - should concentrate on the natural rate of interest. >Rate of return/Rothbard. Rothbard III 795 Purchasing power: In these examples, the natural interest rate on the market has contained a purchasing-power component, which corrects for real rates, positively in money terms during a general expansion, and negatively during a general contraction. Loan rate: The Ioan rate will be simply a reflection ofwhat has been happening in the natural rate. So far, the discussion is similar to Fisher's, except that these are the effects of actual, not anticipated, changes and the Fisher thesis cannot take account of the negative interest rate case. >Fisher, Irving, >Market interest rate/Fisher. Rothbard: We have seen that rather than take a monetary loss, even though their real return will be the same, entrepreneurs will hold back their purchases of factors until factor prices fall immediately to their future Iow level. >Factor market. Prices: But this process of anticipatory price movement does not occur only in the extreme case of a prospective "negative" return. >Rate of return. lt happens whenever a price change is anticipated. Thus, suppose all entrepreneurs generally anticipate that prices will double in two years. The fact of an anticipated rise will lead to an increase in the price level now and an approach immediately toward a doubled price level. An anticipated fall will lead to an immediate fall in factor prices. If all changes were anticipated by everyone, there would be no room for a purchasing-power component to develop. Prices would simply fall immediately to their future level. Purchasing power: The purchasing-power component, then, is not the reflection, as has been thought, of expectations of changes in purchasing power. It is the reflection of the change itself;(…). Rothbard III 796 Componets of the natural interest rate (all reflected in the loan interest rate): a) (…) the pure rate of interest - the result of individual time preferences, tending to be uniform throughout the economy. b) (…) the specific entrepreneurial rates of interest. These differ from firm to firm and so are not uniform. They are anticipated in advance, and they are the rates that an investor will have to anticipate receiving before he enters the field. A particularly "risky" venture, if successful at all, will therefore tend to earn more in net return than what is generally anticipated to be a "safe" venture. c) (…) the purchasing-power component, correcting for general PPM (purchasing power of monetary unit) changes because of the inevitable time lags in production. This will be positive in an expansion and negative in a contraction, but will be ephemeral. The more that changes in the PPM are anticipated, the less important will be the purchasing-power component and the more rapid will be the adjustment in the PPM itself. d) There is still a fourth component: This exists to the extent that money changes are not neutral (and they never are). Sometimes product prices rise and fall faster than factor prices, sometimes they rise and fall more slowly, and sometimes their behavior is mixed, with some factor prices and some product prices rising more rapidly. >Factor market. Whenever there is a general divergence in rates of movement between the prices of the product and of original factors, a terms-of-trade component emerges in the natural rate of interest. >Terms of trade/Rothbard._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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