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Do Monetary Policy Shocks Affect the Neutral Rate of Interest?

Author

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  • Danilo Leiva-León
  • Rodrigo Sekkel
  • Luis Uzeda

Abstract

We develop a Trend-Cycle Bayesian VAR that jointly estimates the real neutral rate of interest, r_t^*, and identifies monetary policy shocks. A key innovation is that cyclical shocks, notably monetary policy shocks, can affect the trend of macroeconomic variables, providing a way to assess whether transitory disturbances have persistent effects. Using external instruments, we find that contractionary shocks reduce r_t^* and lower trend GDP growth. Although they generate sizable movements, their contribution to the secular decline in r_t^* is modest and slightly positive since the early 1990s. Cross-country evidence shows similar patterns.

Suggested Citation

  • Danilo Leiva-León & Rodrigo Sekkel & Luis Uzeda, 2026. "Do Monetary Policy Shocks Affect the Neutral Rate of Interest?," Staff Working Papers 26-6, Bank of Canada.
    • Handle: RePEc:bca:bocawp:26-6
    DOI: 10.34989/swp-2026-6
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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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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