Money As Indicator for the Natural Rate of Interest
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Summary:
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.
Series:
Working Paper No. 2012/006
Subject:
Banking Consumption Demand for money Monetary policy Monetary policy frameworks Money National accounts Output gap Production Productivity
English
Publication Date:
January 1, 2012
ISBN/ISSN:
9781463930554/1018-5941
Stock No:
WPIEA2012006
Pages:
52
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