Money As Indicator for the Natural Rate of Interest

January 1, 2012

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Format: Chicago

Helge Berger, and Henning Weber. Money As Indicator for the Natural Rate of Interest, (USA: International Monetary Fund, 2012) accessed December 30, 2024

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.

Subject: Banking, Consumption, Demand for money, Monetary policy, Monetary policy frameworks, Money, National accounts, Output gap, Production, Productivity

Keywords: Consumption, Demand for money, Gap coefficient, Interest rate rule, Monetary policy, Monetary policy frameworks, Money demand, Money gap, Natural interest rate, Observed output gap, Optimal monetary rule, Output gap, Policy rule, Productivity, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/006
Stock No:

WPIEA2012006
ISBN:

9781463930554
ISSN:

1018-5941

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