The role of the natural rate of interest in monetary policy
Bank for International Settlements, Monetary and Economic Dept., 2005 - Business & Economics - 18 pages
This paper examines the role of the natural rate of interest in the conduct of monetary policy. The natural rate figures prominently in many theories of the business cycle and of inflation fluctuations, and therefore has the potential to play a key role in monetary policy given the current mandates of many central banks. However, the presence of financial imperfections and measurement uncertainty draw into question whether estimates of the natural rate can be reliable indicators of excess demand pressures. Natural rate-based theories may, nonetheless, provide useful guidance in the formulation of desirable monetary policies.
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2000 United Kingdom aggregate price Amato and Laubach central bank Claudio Borio conduct of monetary credit spreads cumulative process deﬁned deﬁnition economy without nominal equilibrium models equilibrium real interest ex post real expectations Federal Reserve Bank ﬁnance ﬁnancial imperfections ﬁnancial market ﬁrst ﬂuctuations gap and inﬂation Giannoni inﬂation determination inﬂation target inﬂuence interest rate gaps interest rate rules investment Keynesian models Kydland long-run natural rate macroeconomic mimeo Monetary policy rules natural rate theories natural rate-based theory nominal rigidities Optimal monetary policy output and inﬂation output gap policy makers policy rate post real interest post real rate price inﬂation price level price stability productivity of capital quantity theory rate of interest real business cycle real interest rate real rate gaps risk premia role in monetary short-term real interest signiﬁcant speciﬁc stabilisation sticky prices supply shocks Taylor rule theory of inﬂation transmission mechanism TVP estimate V\ﬁcksell's variables Viﬁcksell Wicksell Woodford