Can the fall in the real interest rate be attributed to a fall in the neutral real interest rate?

The fall in the real interest rate in OECD countries is often attributed to a fall in the neutral real interest rate. The neutral real interest rate is the one that equalises savings and long-term investment, when the inflation rate is stable and equal to both expected inflation and the central bank’s inflation target. It normally guides the interest rate set by the central bank. But this reference to the neutral real interest rate is not correct, for two reasons: Even in the long term, the real interest rate still depends heavily on discretionary monetary policy choices (there is no monetary neutrality), and depends to a limited extent on the ex ante gap between savings and investment. There may be circularity: expansionary monetary policy drives down the real interest rate, which is attributed to the fall in the neutral real interest rate, and prevents an exit from expansionary monetary policy; In an open economy with high international capital mobility, an ex ante gap between savings and investment is reduced through a change in the current account balance (through loans to or borrowing from the rest of the world), not through a change in real interest rates. The concept of a neutral real interest rate is therefore not usable. Moreover, the real interest rate has fallen both in the United States, where there is a shortfall in savings, and in the euro zone, where there is an excess of savings.