Money as Indicator for the Natural Rate of Interest
Author/Editor: Helge Berger, Henning Weber
Release Date: © January, 2012
ISBN
: 978-1-46393-055-4
Stock #: WPIEA2012006
English
Stock Status: On back-order
Languages and formats available
English | French | Spanish | Arabic | Russian | Chinese | Portuguese | |
Paperback | Yes | ||||||
Yes |
Description
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.
Taxonomy
Banks and banking , Central banks , Demand for money , Economic policy , Financial institutions and markets , Monetary policy
More publications in this series: Working Papers
More publications by: Helge Berger ; Henning Weber