Evolution On The Natural Rate Of Interest Theory And Its Application In China

As financial system and electronic technology developed, money supply is more and more difficult to control so that many countries gave up this policy goal and turn to goals like inflation rate, interest rate or output level. As the establishment and realization of these goals are related to the estimation of an important economic variable——natural interest of rate, the theory of it comes up to people’s sight again after falling dormant for hundred of years. The natural rate of interest theory which includes the famous Wicksell accumulation process was first proposed by Swedish economist Wicksell. The theory suggests that interest rate arose from monetary credit is not the rate which makes save and invest an equilibrium. Due to the instability of currency circulation and development of contemporary bank credit system, money rate can often keep on a higher or lower level than equilibrium rate for a long time. Whenever the rate is higher there will be an upward Wicksell accumulation process and vice versa. The equilibrium rate above is exactly the natural rate of interest named by Wicksell which arose from credit in kind. The publishing of Wicksell’s theory directly pushed the formation of Swedish school forward. By efforts of his disciples Myrdal and Lindhal, natural rate theory grew more and more mature. What’s more, it was a sign of an economical transformation from microeconomics to macroeconomics as well as transformation from free enterprise to state intervention, breaking out the classical dichotomy of money. And with it, Keynes got great illuminations so that the theories of Keynes and his heirs had a profound source with Wicksell’s natural rate theory.After noting the part improved by Myrdal and Lindhal and revealing that the kernel of Keynes’ theory was also Wicksell’s, the last part of paper performs quantitative estimates for natural interest rate of China in 2006-2014 by the help of VAR method and gives the explanation of price fluctuation and economic growth in that period. The study on natural rate of interest is scarce so far in China, but if China is going to approach the international situation in changing currency policy goals, the relevant issues for natural rate of interest will be inescapable.