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Estimating the Natural Rate of Interest: A SVAR Approach

  • Michał Brzoza-Brzezina

For the successful conduct of monetary policy the central bank needs reliable indicators of the monetary policy stance. A recently often advocated one is the gap between the real, market and the natural rate of interest. In this article we estimate the historical time series of the natural rate of interest using a structural vector autoregressive model. This method returns plausible results and thus seems to be well designed for the estimation of the natural rate of interest. We show that the natural rate exhibits quite substantial variability over time, of comparable magnitude to the variability of the real interest rate. We also find that it is a procyclical variable. We conclude that the gap between the natural and real market interest rates can be considered a useful, although not perfect, indicator of the stance of monetary policy.

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Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 27.

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Length: 24
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:nbp:nbpmis:27
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  1. Neiss, Katharine S. & Nelson, Edward, 2003. "The Real-Interest-Rate Gap As An Inflation Indicator," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 239-262, April.
  2. Iris Claus, 2003. "Estimating potential output for New Zealand," Applied Economics, Taylor & Francis Journals, vol. 35(7), pages 751-760.
  3. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.).
  4. Joanne Archibald & Leni Hunter, 2001. "What is the neutral real interest rate, and how can we use it?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 64, September.
  5. Chadha, J.S. & Nolan, C., 2001. "Supply Shocks and the ‘Natural Rate of Interest': an Exploration," Cambridge Working Papers in Economics 0103, Faculty of Economics, University of Cambridge.
  6. James Bullard, 1999. "Testing long-run monetary neutrality propositions: lessons from the recent research," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 57-77.
  7. Michał Brzoza-Brzezina, 2002. "The Relationship between Real Interest Rates and Inflation," National Bank of Poland Working Papers 23, National Bank of Poland, Economic Institute.
  8. Lanne , Markku, 2002. "Nonlinear dynamics of interest rate and inflation," Research Discussion Papers 21/2002, Bank of Finland.
  9. Jeff Fuhrer & George Moore, 1993. "Monetary policy and the behavior of long-term interest rates," Working Papers in Applied Economic Theory 93-05, Federal Reserve Bank of San Francisco.
  10. Bond, Stephen R & Jenkinson, Tim, 1996. "The Assessment: Investment Performance and Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 1-29, Summer.
  11. Wicksell, Knut, 1907. "The Influence of the Rate of Interest on Prices," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 17, pages 213-220.
  12. Fuhrer, Jeffrey C & Moore, George R, 1995. "Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1060-70, November.
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