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Money As Indicator for the Natural Rate of Interest

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  • Helge Berger
  • Henning Weber

Abstract

The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/6.

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Length: 52
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/6

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Keywords: Economic models; Interest rates; money demand; central bank; monetary policy; correlation; inflation; calibration; equation; standard deviation; equations; optimal monetary policy; monetary economics; monetary policy regime; discount rate; monetary fund; covariance; money balances; monetary policy rule; monetary model; demand for money; aggregate demand; monetary policy rules; polynomial; quantity theory of money; theory of money; statistics; measurement error; optimization; standard deviations; monetary analysis; monetary indicator; general equilibrium model; monetary assets; survey; functional form; econometrics; error variance; time series; probability; correlations; separability; conditional expectation; sampling;

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References

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Cited by:
  1. John Keating & Andrew Lee Smith, 2013. "Price Versus Financial Stability: A role for money in Taylor rules?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS, University of Kansas, Department of Economics 201307, University of Kansas, Department of Economics.

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