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.
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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)
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