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Natural equilibrium real interest rate estimates and monetary policy design

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  • Philip Arestis
  • Georgios E. Chortareas

Abstract

Practical monetary policy concerns and recent theoretical developments have revived interest in the concept of a "natural" equilibrium real interest rate. The natural real interest rate is potentially an important concept for monetary policy makers and some researchers have suggested that the concept of a "real interest rate gap" can be used to evaluate the stance of monetary policy or even set policy. Obtaining an estimate for the equilibrium real interest rate, however, is not straightforward, and the existence of alternative approaches to this task generates uncertainty about those estimates. In this paper, we discuss some conceptual, policy, and modeling issues pertaining to the U.S. equilibrium interest rate. Such issues include the distinction between "natural" and "neutral" real interest rates, the determination of the natural real interest rate in an open economy context, the different ways that productivity may affect the natural equilibrium real interest rate, and the sensitivity of theoretical measures of the natural equilibrium real interest rates to various parameterizations.

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 29 (2007)
Issue (Month): 4 (July)
Pages: 621-643

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Handle: RePEc:mes:postke:v:29:y:2007:i:4:p:621-643

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

Related research

Keywords: equilibrium real interest rate; monetary policy;

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Cited by:
  1. Jens Klose, 2012. "Political business cycles and monetary policy revisited–an application of a two-dimensional asymmetric Taylor reaction function," International Economics and Economic Policy, Springer, vol. 9(3), pages 265-295, September.
  2. Belke, Ansgar & Klose, Jens, 2013. "Modifying Taylor reaction functions in the presence of the zero‐lower‐bound — Evidence for the ECB and the Fed," Economic Modelling, Elsevier, vol. 35(C), pages 515-527.
  3. Angel Asensio, 2007. "Inflation targeting drawbacks in the absence of a 'natural' anchor," Post-Print halshs-00189225, HAL.
  4. Ansgar Belke & Jens Klose, 2012. "Modifying Taylor Reaction Functions in Presence of the Zero-Lower-Bound – Evidence for the ECB and the Fed," ROME Working Papers 201203, ROME Network.

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