Money As Indicator for the Natural Rate of Interest [electronic resource] / Helge Berger.
Material type: TextSeries: IMF Working Papers; Working Paper ; No. 12/6Publication details: Washington, D.C. : International Monetary Fund, 2012Description: 1 online resource (52 p.)ISBN: 1463930550 :ISSN: 1018-5941Subject(s): Central Bank | Correlation | Inflation | Natural Interest Rate | Optimal Monetary Rule | IrelandAdditional physical formats: Print Version:: Money As Indicator for the Natural Rate of InterestOnline resources: IMF e-Library | IMF Book Store 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.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.
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