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Money As Indicator for the Natural Rate of Interest

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  • Helge Berger
  • Henning Weber

Abstract

The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.

Suggested Citation

  • Helge Berger & Henning Weber, 2012. "Money As Indicator for the Natural Rate of Interest," IMF Working Papers 12/6, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/6
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    References listed on IDEAS

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    Cited by:

    1. John Keating & Andrew Lee Smith, 2013. "Price Versus Financial Stability: A role for money in Taylor rules?," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201307, University of Kansas, Department of Economics.

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    Keywords

    Economic models; Central banks; Demand for money; Interest rates; Money demand; Monetary policy; Natural interest rate; optimal monetary rule; central bank; correlation; inflation;

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