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Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations

Author

Listed:
  • John B. Taylor

    (Department of Economics, Stanford University)

  • Volker Wieland

Abstract

Recently there has been an explosion of research on whether the equilibrium real interest rate has declined, an issue with significant implications for monetary policy. A common finding is that the rate has declined. In this paper we provide evidence that contradicts this finding. We show that the perceived decline may well be due to shifts in regulatory policy and monetary policy that have been omitted from the research. In developing the monetary policy implications, it is promising that much of the research approaches the policy problem through the framework of monetary policy rules, as uncertainty in the equilibrium real rate is not a reason to abandon rules in favor of discretion. But the results are still inconclusive and too uncertain to incorporate into policy rules in the ways that have been suggested.

Suggested Citation

  • John B. Taylor & Volker Wieland, 2016. "Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations," Economics Working Papers 16109, Hoover Institution, Stanford University.
  • Handle: RePEc:hoo:wpaper:16109
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    References listed on IDEAS

    as
    1. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
    2. Wieland, Volker & Wolters, Maik, 2014. "Is there a threat of self-reinforcing deflation in the euro area? A view through the lens of the Phillips curve," Kiel Policy Brief 79, Kiel Institute for the World Economy (IfW).
    3. Curdia, Vasco, 2015. "Why so slow? A gradual return for interest rates," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    4. John B. Taylor & Volker Wieland, 2012. "Surprising Comparative Properties of Monetary Models: Results from a New Model Database," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 800-816, August.
    5. Elena Afanasyeva & Jochen Güntner, 2014. "Lending Standards, Credit Booms and Monetary Policy," Economics working papers 2014-11, Department of Economics, Johannes Kepler University Linz, Austria.
    6. Andrew Levin & Volker Wieland & John C. Williams, 2003. "The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty," American Economic Review, American Economic Association, vol. 93(3), pages 622-645, June.
    7. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters,in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
    8. Bletzinger, Tilman & Wieland, Volker, 2016. "Forward guidance and "lower for longer": The case of the ECB," CEPR Discussion Papers 11117, C.E.P.R. Discussion Papers.
    9. Robert Barsky & Alejandro Justiniano & Leonardo Melosi, 2014. "The Natural Rate of Interest and Its Usefulness for Monetary Policy," American Economic Review, American Economic Association, vol. 104(5), pages 37-43, May.
    10. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    11. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
    12. Lubik, Thomas A. & Matthes, Christian, 2015. "Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue Oct, pages 1-6.
    13. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, C.E.P.R. Discussion Papers.
    14. Kiley, Michael T., 2015. "What Can the Data Tell Us About the Equilibrium Real Interest Rate?," Finance and Economics Discussion Series 2015-77, Board of Governors of the Federal Reserve System (U.S.).
    15. Cúrdia, Vasco & Ferrero, Andrea & Ng, Ging Cee & Tambalotti, Andrea, 2015. "Has U.S. monetary policy tracked the efficient interest rate?," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 72-83.
    16. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    17. Beyer, Robert C. M. & Wieland, Volker, 2015. "Schätzung des mittelfristigen Gleichgewichtszinses in den Vereinigten Staaten, Deutschland und dem Euro-Raum mit der Laubach-Williams-Methode," Working Papers 03/2015, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
    18. Fecht, Falko & Inderst, Roman & Pfeil, Sebastian, 2015. "A theory of the boundaries of banks with implications for financial integration and regulation," IMFS Working Paper Series 87, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    19. Carlstrom, Charles T. & Fuerst, Timothy S., 2016. "The Natural Rate of Interest in Taylor Rules," Economic Commentary, Federal Reserve Bank of Cleveland, issue March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Think Again and Again About the Natural Rate of Interest
      by John Taylor in Economics One on 2016-09-12 20:45:56

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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    Cited by:

    1. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    2. repec:eee:jmacro:v:54:y:2017:i:pa:p:7-11 is not listed on IDEAS
    3. Cukierman, Alex, 2016. "Reflections on the natural rate of interest, its measurement, monetary policy and the zero lower bound," CEPR Discussion Papers 11467, C.E.P.R. Discussion Papers.
    4. repec:pal:buseco:v:52:y:2017:i:2:d:10.1057_s11369-017-0035-3 is not listed on IDEAS
    5. Beyer, Robert & Wieland, Volker, 2017. "Instability, imprecision and inconsistent use of equilibrium real interest rate estimates," IMFS Working Paper Series 110, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    6. Rasa Stasiukynaite, 2017. "Understanding Monetary Policy Stance," Bank of Lithuania Occasional Paper Series 14, Bank of Lithuania.
    7. repec:zbw:svrwjg:201718 is not listed on IDEAS
    8. Barslund, Mikkel & Ludolph, Lars, 2017. "Could the decrease in Belgian government debt-servicing costs offset increased age-related expenditure?," CEPS Papers 12598, Centre for European Policy Studies.

    More about this item

    JEL classification:

    • 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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