Neutral real interest rates revisited
AbstractMonetary policy decision-making commonly involves setting interest rates to stimulate the economy and prevent deflationary forces gathering momentum, or to constrain the economy and prevent inflationary forces gathering momentum. In setting interest rates, therefore, one needs to know what level of interest rates will stimulate and what level will constrain economic activity. Whereabouts is the dividing line? This is the question that we address in this article. It turns out that it is very difficult to come up with a precise answer, as a range of different analytical approaches provides a range of answers. In the process of trying to identify the "neutral" interest rate that is the dividing line between stimulatory and contractionary, we discuss its evolution through time. We also note that, after allowance for inflation, and for a decline in the inflation-adjusted neutral interest rate, the neutral interest rate in New Zealand remains high relative to comparable countries. Although possible reasons for the decline and for the relatively high level in New Zealand are ventured, they are not the prime focus of this article.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.
Volume (Year): 66 (2003)
Issue (Month): (September)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Athanasios Orphanides & John C. Williams, 2003.
"Robust monetary policy rules with unknown natural rates,"
Finance and Economics Discussion Series
2003-11, Board of Governors of the Federal Reserve System (U.S.).
- Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
- Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
- Thomas Laubach and John C. Williams, 2001.
"Measuring the Natural Rate of Interest,"
Computing in Economics and Finance 2001
35, Society for Computational Economics.
- Olivier Basdevant, 2003. "On applications of state-space modelling in macroeconomics," Reserve Bank of New Zealand Discussion Paper Series DP2003/02, Reserve Bank of New Zealand.
- Katharine S. Neiss and Edward Nelson, 2001.
"The Real Interest Rate Gap as an Inflation Indicator,"
Computing in Economics and Finance 2001
145, Society for Computational Economics.
- Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
- Neiss, Katharine & Nelson, Edward, 2001. "The Real Interest rate Gap as an Inflation Indicator," CEPR Discussion Papers 2848, C.E.P.R. Discussion Papers.
- Katharine S. Neiss & Edward Nelson, 2001. "The real interest rate gap as an inflation indicator," Bank of England working papers 130, Bank of England.
- Robert J. Hodrick & Edward Prescott, 1981.
"Post-War U.S. Business Cycles: An Empirical Investigation,"
451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
- Giammarioli, Nicola & Valla, Natacha, 2003. "The natural real rate of interest in the euro area," Working Paper Series 0233, European Central Bank.
- Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
- Olivier Basdevant & David Hargreaves, 2003. "Modelling structural change: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/03, Reserve Bank of New Zealand.
- Ernest Gnan & Doris Ritzberger-Grünwald, 2005. "The Natural Rate of Interest — Concepts and Appraisal for the Euro Area," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 29â47, January 2.
- Cour-Thimann, Philippine & Pilegaard, Rasmus & Stracca, Livio, 2006. "The output gap and the real interest rate gap in the euro area, 1960-2003," Journal of Policy Modeling, Elsevier, vol. 28(7), pages 775-790, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre).
If references are entirely missing, you can add them using this form.