First, the supply of loans offered by banks is adversely affected by monetary policy tightening via an increase in bank funding costs. [4] Second, borrower-lender agency costs further reduce the willingness of banks to lend during periods of higher monetary policy rates or lower economic activity. [5] Third, bank balance sheet constraints amplify the contraction in credit availability brought about by policy tightening.
By contrast, Laubach and Williams (2015) employ a statistical approach that defines the natural rate as one consistent with the economy operating at its full potential once transitory shocks to aggregate supply and demand have abated. These two approaches to the measurement of the natural real rate are different but have important similarities.