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Money as Indicator for the Natural Rate of Interest

Author/Editor: Berger, Helge | Weber, Henning
Authorized for Distribution: January 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,084KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

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. 12/6
Subject(s): Central banks | Demand for money | Economic models | Interest rates | Monetary policy | Money
Author's keyword(s): Natural interest rate | money demand | optimal monetary rule
 
English  
    Published:   January 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012006   Pages:   51
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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