Do Monetary Policy Shocks Affect the Neutral Rate of Interest?

Danilo Leiva-León, Rodrigo Sekkel and Luis Uzeda

Staff Working Papers from Bank of Canada

Abstract: We develop a Trend-Cycle Bayesian VAR that jointly estimates the real neutral rate of interest, r_t^*, and identifies monetary policy shocks. A key innovation is that cyclical shocks, notably monetary policy shocks, can affect the trend of macroeconomic variables, providing a way to assess whether transitory disturbances have persistent effects. Using external instruments, we find that contractionary shocks reduce r_t^* and lower trend GDP growth. Although they generate sizable movements, their contribution to the secular decline in r_t^* is modest and slightly positive since the early 1990s. Cross-country evidence shows similar patterns.

Keywords: Models and tools; Econometric; statistical and computational methods; Monetary policy; Monetary policy framework and transmission; Monetary policy tools and implementation (search for similar items in EconPapers)
JEL-codes: C32 C51 E32 E44 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2026-03
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:26-6

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