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

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  • 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.

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

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Date of creation: 2014
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Handle: RePEc:pra:mprapa:57212

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

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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.

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