Advanced Search
MyIDEAS: Login to save this paper or follow this series

Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation

Contents:

Author Info

  • Olmos, Lorena
  • Sanso Frago, Marcos

Abstract

Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate.

Download Info

If 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.
File URL: http://mpra.ub.uni-muenchen.de/57212/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 57212.

as in new window
Length:
Date of creation: 2014
Date of revision:
Handle: RePEc:pra:mprapa:57212

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: natural rate of interest; New Keynesian DSGE models; endogenous growth; �financial frictions; trend inflation;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 258-262, May.
  2. Javier Andrés & David López-Salido & Edward Nelson, 2008. "Money and the natural rate of interest: structural estimates for the United States and the euro area," Banco de Espa�a Working Papers 0805, Banco de Espa�a.
  3. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 361-68, July.
  4. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics, EconWPA 9907006, EconWPA.
  5. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 16(3), pages 395-413, December.
  6. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
  7. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 232-237, May.
  8. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
  9. Tristani, Oreste, 2007. "Model misspecification, the equilibrium natural interest rate and the equity premium," Working Paper Series, European Central Bank 0808, European Central Bank.
  10. John B. Taylor & John C. Williams, 2010. "Simple and Robust Rules for Monetary Policy," NBER Working Papers 15908, National Bureau of Economic Research, Inc.
  11. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(5), pages 1109-1146, July.
  12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  13. John C. Williams, 2009. "Heeding Daedalus: Optimal Inflation and the Zero Lower Bound," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 1-49.
  14. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  15. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(1), pages 17-34, January.
  16. Jeffery D. Amato, 2005. "The role of the natural rate of interest in monetary policy," BIS Working Papers 171, Bank for International Settlements.
  17. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  18. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2101-26, December.
  19. Philip Arestis & Malcolm Sawyer, 2008. "A critical reconsideration of the foundations of monetary policy in the new consensus macroeconomics framework," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 32(5), pages 761-779, September.
  20. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 605-631, April.
  21. Frank Smets, 1998. "Output gap uncertainty: does it matter for the Taylor rule?," BIS Working Papers 60, Bank for International Settlements.
  22. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, Elsevier, vol. 51(7), pages 1768-1784, October.
  23. Axel A. Weber & Wolfgang Lemke & Andreas Worms, 2008. "How useful is the concept of the natural real rate of interest for monetary policy?," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 32(1), pages 49-63, January.
  24. De Fiore, Fiorella & Tristani, Oreste, 2008. "Credit and the natural rate of interest," Working Paper Series, European Central Bank 0889, European Central Bank.
  25. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
  26. Andrea Tambalotti & Andrea Ferrero & Vasco Curdia, 2010. "Evaluating Interest Rate Rules in an Estimated DSGE Model," 2010 Meeting Papers, Society for Economic Dynamics 402, Society for Economic Dynamics.
  27. Bomfim, Antulio N, 1997. "The Equilibrium Fed Funds Rate and the Indicator Properties of Term-Structure Spreads," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 35(4), pages 830-46, October.
  28. Stefano Neri & Tiziano Ropele, 2012. "Imperfect Information, Real‐Time Data and Monetary Policy in the Euro Area," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 122(561), pages 651-674, 06.
  29. Orphanides, Athanasios & Porter, Richard D. & Reifschneider, David & Tetlow, Robert & Finan, Frederico, 2000. "Errors in the measurement of the output gap and the design of monetary policy," Journal of Economics and Business, Elsevier, Elsevier, vol. 52(1-2), pages 117-141.
  30. Claudio Borio & Frank Piti Disyatat & Mikael Juselius, 2013. "Rethinking potential output: Embedding information about the financial cycle," BIS Working Papers 404, Bank for International Settlements.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Olmos, Lorena & Sanso Frago, Marcos, 2014. "Non-linear effects of the U.S. Monetary Policy in the Long Run," MPRA Paper 57770, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:57212. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.