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Wicksell's Classical Dichotomy: Is The Natural Rate Of Interest Independent of the Money Rate of Interest ?

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  • Michael Beenstock

    (Hebrew University of Jerusalem)

  • Alex Ilek

    (Bank of Israel)

Abstract

Proponents of Taylor Rules assume that the natural rate of interest is independent of the rate of interest set by the central bank. We use data for Israel to test this hypothesis. We proxy the natural rate of interest by the forward yield to maturity on indexed linked treasury bonds. If the null hypothesis is false it is difficult to suggest persuasive instruments that would identify the causal effect of the money rate on the natural rate of interest. Our identification strategy is therefore built around natural experimentation and event analysis. Large and seemingly exogenous shocks to monetary policy have no measurable effect on the natural rate of interest according to nonparametric and parametric tests. Therefore Wicksell's Classical Dichotomy is empirically valid.

Suggested Citation

  • Michael Beenstock & Alex Ilek, 2005. "Wicksell's Classical Dichotomy: Is The Natural Rate Of Interest Independent of the Money Rate of Interest ?," Bank of Israel Working Papers 2005.04b, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2005.04b
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    Cited by:

    1. Philip Arestis & Georgios Chortareas, 2007. "Natural equilibrium real interest rate estimates and monetary policy design," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(4), pages 621-643.
    2. Ilek, Alex, 2021. "Are monetary surprises effective? The view of professional forecasters in Israel," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 516-530.
    3. David Elkayam & Guy Segal, 2018. "Estimated Natural Rate of Interest in an Open Economy: The Case of Israel," Bank of Israel Working Papers 2018.05, Bank of Israel.
    4. Eyal Argov & Emanuel Barnea & Alon Binyamini & Eliezer Borenstein & David Elkayam & Irit Rozenshtrom, 2012. "MOISE: A DSGE Model for the Israeli Economy," Bank of Israel Working Papers 2012.06, Bank of Israel.
    5. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.
    6. Alex Ilek, 2007. "Aggregation versus Disaggregation - What can we learn from it?," Bank of Israel Working Papers 2007.02b, Bank of Israel.
    7. Romain Bouis & Łukasz Rawdanowicz & Jean-Paul Renne & Shingo Watanabe & Ane Kathrine Christensen, 2013. "The Effectiveness of Monetary Policy since the Onset of the Financial Crisis," OECD Economics Department Working Papers 1081, OECD Publishing.
    8. Alex Ilek & Guy Segal, 2022. "A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies," Bank of Israel Working Papers 2022.06, Bank of Israel.

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