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The Credit Cycle and Measurement of the Natural Rate of Interest

Author

Listed:
  • Elena Deryugina

    (Bank of Russia, Moscow, Russian Federation)

  • Maria Guseva

    (Bank of Russia, Moscow, Russian Federation)

  • Alexey Ponomarenko

    (Bank of Russia, Moscow, Russian Federation)

Abstract

We conduct a Monte Carlo experiment using an ad-hoc New Keynesian model and a tractable agent-based model to generate artificial credit cycle episodes. We show that fluctuations in the implicit measures of the natural rate of interest obtained using a conventional trivariate Kalman filter on these artificial datasets occur in the vicinity of credit cycle peaks without any underlying changes in fundamentals (that is the agents’ type or their behaviour). The empirical analysis confirms that the measures of the natural interest rate tend to increase prior to a credit cycle peak and decrease afterwards. We conclude that a decline in the estimated natural rates of interest does not necessarily indicate changes in macroeconomic fundamentals. Instead, it may simply reflect the innate properties of the measurement technique in the vicinity of credit cycle peaks.

Suggested Citation

  • Elena Deryugina & Maria Guseva & Alexey Ponomarenko, 2022. "The Credit Cycle and Measurement of the Natural Rate of Interest," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(1), pages 87-104.
    • Handle: RePEc:cbk:journl:v:11:y:2022:i:1:p:87-104
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    References listed on IDEAS

    as
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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