Star-struck; Monetary Policy and the Neutral Rate

Garo Garabedian
Additional contact information
Garo Garabedian: Central Bank of Ireland

No 4/RT/25, Research Technical Papers from Central Bank of Ireland

Abstract: We disentangle macroeconomic surprises in a structural Bayesian VAR, and show that common measures of the short-term neutral rate underreact to shocks that affect the near term productive capacity of the economy. In contrast, these measures overreact to transitory demand shocks, such as monetary policy shocks. Their impact is persistent, making short term shocks hard to distinguish from secular trends. Our findings are robust across a large array of r-star measures. Particularly when the economy is near the effective lower bound, expansionary monetary policy has a forceful downwards impact on r-star. Hence, the neutral rate is not exogenous as in the Neo-Wicksellian paradigm. For our main analysis, we extend the Holston-Labauch-Williams estimate back to the 1920s, thus revealing a non-monotonic time-series. We add to the debate on the use of r-star in the policy realm, and the effectiveness of monetary policy tools when rates are low.

Keywords: Equilibrium real interest rate; R*; long-term rates; cyclical drivers; macroeconomic shocks; monetary policy; structural Bayesian VAR; sign restrictions. (search for similar items in EconPapers)
JEL-codes: C11 E43 E52 (search for similar items in EconPapers)
Date: 2025-06
New Economics Papers: this item is included in nep-cba, nep-ets and nep-mon
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.centralbank.ie/docs/default-source/pub ... df?sfvrsn=af03681a_4 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbi:wpaper:4/rt/25

Access Statistics for this paper

More papers in Research Technical Papers from Central Bank of Ireland Contact information at EDIRC.
Bibliographic data for series maintained by Fiona Farrelly ().