Estimating the Natural Rate of Interest: A SVAR Approach
AbstractFor 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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Date of creation: 28 Jan 2003
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natural rate of interest; SVAR; monetary policy; interest rate gap;
Other versions of this item:
- Michał Brzoza-Brzezina, 2002. "Estimating the Natural Rate of Interest: A SVAR Approach," National Bank of Poland Working Papers 27, National Bank of Poland, Economic Institute.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-03 (All new papers)
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