Estimating the Natural Rate of Interest: A SVAR Approach

Michal Brzoza-Brzezina

No 27, National Bank of Poland Working Papers from National Bank of Poland, Economic Institute

Abstract: For the successful conduct of monetary policy the central bank needs reliable indicators of the monetary policy stance. A recently often advocated one is the gap between the real, market and the natural rate of interest. In this article we estimate the historical time series of the natural rate of interest using a structural vector autoregressive model. This method returns plausible results and thus seems to be well designed for the estimation of the natural rate of interest. We show that the natural rate exhibits quite substantial variability over time, of comparable magnitude to the variability of the real interest rate. We also find that it is a procyclical variable. We conclude that the gap between the natural and real market interest rates can be considered a useful, although not perfect, indicator of the stance of monetary policy.

Keywords: natural rate of interest; interest rate gap; monetary policy; SVAR (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Date: 2002-12
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Working Paper: Estimating the Natural Rate of Interest: A SVAR Approach (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:nbp:nbpmis:27

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