The Riddle of the Natural Rate of Interest

We rely on microeconomics theory to compute the natural rate of interest for the G7 countries from 2001 to 2017. The equilibrium natural rate of interest is determined by a parsimonious equation that is easily computed from readily observable data, hence no estimation errors. The model predicts that the natural rate of interest is equal to the consumption-leisure growth rate less the capital-labor growth rate, which is zero in the steady state, no growth. It is positive (negative) when the consumption-leisure growth gap is greater (smaller) than the capital-labor growth gap. The model predicts that fiscal expansion is an expensive policy to stimulate the economy when the Zero Lower Bound (ZLB) constraint is binding.