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Estimating the Natural Rate of Interest: A SVAR Approach

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  • Michal Brzoza-Brzezina

    (National Bank of Poland, Warsaw School of Economics)

Abstract

For the successful conduct of monetary policy the central bank needs reliable indicators of the monetary policy stance. A recently often advocated one is the gap between the real, market and the natural rate of interest. In this article we estimate the historical time series of the natural rate of interest using a structural vector autoregressive model. This method returns plausible results and thus seems to be well designed for the estimation of the natural rate of interest. We show that the natural rate exhibits quite substantial variability over time, of comparable magnitude to the variability of the real interest rate. We also find that it is a procyclical variable. We conclude that the gap between the natural and real market interest rates can be considered a useful, although not perfect, indicator of the stance of monetary policy.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0301008.

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Date of creation: 28 Jan 2003
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Handle: RePEc:wpa:wuwpma:0301008

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Web page: http://128.118.178.162

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Keywords: natural rate of interest; SVAR; monetary policy; interest rate gap;

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References

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  1. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.).
  2. Fuhrer, Jeffrey C & Moore, George R, 1995. "Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1060-70, November.
  3. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  4. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
  5. Markku Lanne, 2004. "Nonlinear dynamics of interest rate and inflation," Macroeconomics 0405014, EconWPA.
  6. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  7. Jeff Fuhrer & George Moore, 1993. "Monetary policy and the behavior of long-term interest rates," Working Papers in Applied Economic Theory 93-05, Federal Reserve Bank of San Francisco.
  8. Chadha, J.S. & Nolan, C., 2001. "Supply Shocks and the ‘Natural Rate of Interest': an Exploration," Cambridge Working Papers in Economics 0103, Faculty of Economics, University of Cambridge.
  9. Wicksell, Knut, 1907. "The Influence of the Rate of Interest on Prices," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 17, pages 213-220.
  10. Michał Brzoza-Brzezina, 2002. "The Relationship between Real Interest Rates and Inflation," National Bank of Poland Working Papers 23, National Bank of Poland, Economic Institute.
  11. Iris Claus, 2003. "Estimating potential output for New Zealand," Applied Economics, Taylor & Francis Journals, vol. 35(7), pages 751-760.
  12. Bond, Stephen R & Jenkinson, Tim, 1996. "The Assessment: Investment Performance and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 1-29, Summer.
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Cited by:
  1. Rafael Cavalcanti De Araújo & Cleomar Gomes Da Silva, 2014. "The Neutral Interest Rate And The Stance Of Monetary Policy In Brazil," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 051, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. Mesonnier, Jean-Stephane & Renne, Jean-Paul, 2007. "A time-varying "natural" rate of interest for the euro area," European Economic Review, Elsevier, vol. 51(7), pages 1768-1784, October.
  3. Jakub Borowski & Michal Brzoza-Brzezina, 2004. "Designing Poland's Macroeconomic Strategy on the Way to the Euro Area," EUI-RSCAS Working Papers 10, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  4. Jakub Borowski & Michal Brzoza- Brzezina & Piotr Szpunar, 2003. "Exchange Rate Regimes and Poland's Participation in ERM II," Macroeconomics 0302002, EconWPA.
  5. Todd E. Clark & Sharon Kozicki, 2004. "Estimating equilibrium real interest rates in real time," Research Working Paper RWP 04-08, Federal Reserve Bank of Kansas City.
  6. Michal Brzoza-Brzezina, 2004. "The Information Content of the Natural Rate of Interest: The Case of Poland," Macroeconomics 0402007, EconWPA.
  7. Andrzej Toroj, 2011. "Competitiveness channel in Poland and Slovakia: a pre-EMU DSGE analysis," National Bank of Poland Working Papers 86, National Bank of Poland, Economic Institute.
  8. Mésonnier, J-S. & Renne, J-P., 2004. "A Time-Varying Natural Rate for the Euro Area," Working papers 115, Banque de France.

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