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Neutral real interest rates revisited

  • Nils Björksten
  • Özer Karagedikli

    (Reserve Bank of New Zealand)

Monetary policy decision-making commonly involves setting interest rates to stimulate the economy and prevent deflationary forces gathering momentum, or to constrain the economy and prevent inflationary forces gathering momentum. In setting interest rates, therefore, one needs to know what level of interest rates will stimulate and what level will constrain economic activity. Whereabouts is the dividing line? This is the question that we address in this article. It turns out that it is very difficult to come up with a precise answer, as a range of different analytical approaches provides a range of answers. In the process of trying to identify the "neutral" interest rate that is the dividing line between stimulatory and contractionary, we discuss its evolution through time. We also note that, after allowance for inflation, and for a decline in the inflation-adjusted neutral interest rate, the neutral interest rate in New Zealand remains high relative to comparable countries. Although possible reasons for the decline and for the relatively high level in New Zealand are ventured, they are not the prime focus of this article.

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File URL: http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2003/2003sep66_3bjorkstenkaragedikli.pdf
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Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

Volume (Year): 66 (2003)
Issue (Month): (September)
Pages: 11

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Handle: RePEc:nzb:nzbbul:september2003:2
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  1. Athanasios Orphanides & John C. Williams, 2002. "Robust Monetary Policy Rules with Unknown Natural Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 63-146.
  2. 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.
  3. Olivier Basdevant, 2003. "On applications of state-space modelling in macroeconomics," Reserve Bank of New Zealand Discussion Paper Series DP2003/02, Reserve Bank of New Zealand.
  4. 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.
  5. Giammarioli, Nicola & Valla, Natacha, 2003. "The natural real rate of interest in the euro area," Working Paper Series 0233, European Central Bank.
  6. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Olivier Basdevant & David Hargreaves, 2003. "Modelling structural change: the case of New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2003/03, Reserve Bank of New Zealand.
  8. 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.
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