Natural equilibrium real interest rate estimates and monetary policy design

Philip Arestis and Georgios Chortareas

Journal of Post Keynesian Economics, 2007, vol. 29, issue 4, 621-643

Abstract: Practical monetary policy concerns and recent theoretical developments have revived interest in the concept of a "natural" equilibrium real interest rate. The natural real interest rate is potentially an important concept for monetary policy makers and some researchers have suggested that the concept of a "real interest rate gap" can be used to evaluate the stance of monetary policy or even set policy. Obtaining an estimate for the equilibrium real interest rate, however, is not straightforward, and the existence of alternative approaches to this task generates uncertainty about those estimates. In this paper, we discuss some conceptual, policy, and modeling issues pertaining to the U.S. equilibrium interest rate. Such issues include the distinction between "natural" and "neutral" real interest rates, the determination of the natural real interest rate in an open economy context, the different ways that productivity may affect the natural equilibrium real interest rate, and the sensitivity of theoretical measures of the natural equilibrium real interest rates to various parameterizations.

Date: 2007
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DOI: 10.2753/PKE0160-3477290405

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