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Star-struck; Monetary Policy and the Neutral Rate

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  • Garabedian, Garo

    (Central Bank of Ireland)

Abstract

We disentangle macroeconomic surprises in a structural Bayesian VAR, and show that common measures of the short-term neutral rate underreact to shocks that affect the near term productive capacity of the economy. In contrast, these measures overreact to transitory demand shocks, such as monetary policy shocks. Their impact is persistent, making short term shocks hard to distinguish from secular trends. Our findings are robust across a large array of r-star measures. Particularly when the economy is near the effective lower bound, expansionary monetary policy has a forceful downwards impact on r-star. Hence, the neutral rate is not exogenous as in the Neo-Wicksellian paradigm. For our main analysis, we extend the Holston-Labauch-Williams estimate back to the 1920s, thus revealing a non-monotonic time-series. We add to the debate on the use of r-star in the policy realm, and the effectiveness of monetary policy tools when rates are low.

Suggested Citation

  • Garabedian, Garo, 2025. "Star-struck; Monetary Policy and the Neutral Rate," Research Technical Papers 4/RT/25, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:4/rt/25
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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

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