Do Monetary Policy Shocks Affect the Neutral Rate of Interest?

We develop a trend–cycle Bayesian vector autoregression that jointly estimates the real neutral rate of interest, 𝑟𝑡∗, and identifies monetary policy shocks. As a key innovation, the framework allows cyclical shocks, most notably monetary policy shocks, to affect the trend component of macroeconomic variables, providing a new way to assess whether transitory disturbances have persistent effects. Using external instruments, we find that contractionary monetary policy shocks reduce 𝑟𝑡∗ and lower trend GDP growth, while the model’s estimates of 𝑟𝑡∗ remain consistent with standard benchmark measures. We then quantify the contribution of monetary policy shocks to the secular decline in 𝑟𝑡∗. Although these shocks at times generate sizable movements in 𝑟𝑡∗, their contribution to the long-run decline is modest, and their net effect on 𝑟𝑡∗ since the early 1990s is slightly positive. We complement these findings with cross-country evidence from other advanced economies, pointing to similar effects.