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Does natural rate variation matter? Evidence from New Zealand

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Abstract

Natural rates are an important concept within the new Keynesian models often used for monetary policy advice. However, many of these models rely on demeaned interest rate and inflation data. Thus, they implicitly impose the strict assumption that the natural rates of these series are constant. Using New Zealand data and a small open-economy new Keynesian model with time-varying parameters, we estimate the natural real rate of interest, inflation target, potential output, and neutral real exchange rate. We find that the model estimates of the natural real rate of interest and neutral exchange rate display noticeable time variation and considerable uncertainty, while the inflation target has been relatively stable over the sample period. We also compare the results of this model to a model with time-invariant natural rates. The comparison reveals the data prefers the fit of the timevarying model. It also shows that allowing the natural rates to vary over time has implications for the persistence parameters and impulse responses of the model. Classification-C51, E52, F41

Suggested Citation

  • Michael Kirker, 2008. "Does natural rate variation matter? Evidence from New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/17, Reserve Bank of New Zealand.
    • Handle: RePEc:nzb:nzbdps:2008/17
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    Cited by:

    1. Julien Albertini & Güneş Kamber & Michael Kirker, 2012. "Estimated Small Open Economy Model With Frictional Unemployment," Pacific Economic Review, Wiley Blackwell, vol. 17(2), pages 326-353, May.
    2. Ásgeir Daníelsson & Ólafur Sindri Helgason & Stefán Thórarinsson, 2016. "Estimating the Natural Interest Rate for Iceland: An Exploratory Study," Economics wp74, Department of Economics, Central bank of Iceland.
    3. Ross Kendall & Tim Ng, 2013. "Estimated Taylor Rules updated for the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/04, Reserve Bank of New Zealand.
    4. Doojav, Gan-Ochir & Gantumur, Munkhbayar, 2020. "Measuring the natural rate of interest in a commodity exporting economy: Evidence from Mongolia," International Economics, Elsevier, vol. 161(C), pages 199-218.
    5. Willy Chetwin & Amy Wood, 2013. "Neutral interest rates in the post-crisis period," Reserve Bank of New Zealand Analytical Notes series AN2013/07, Reserve Bank of New Zealand.
    6. Adam Richardson & Rebecca Williams, 2015. "Estimating New Zealand’s neutral interest rate," Reserve Bank of New Zealand Analytical Notes series AN2015/05, Reserve Bank of New Zealand.
    7. Daan Steenkamp, 2017. "How bubbly is the New Zealand dollar?," Reserve Bank of New Zealand Discussion Paper Series DP2017/03, Reserve Bank of New Zealand.

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