Monetary Policy and the Natural Rate of Interest

Matthew Canzoneri, Robert Cumby () and Behzad Diba

Journal of Money, Credit and Banking, 2015, vol. 47, issue 2-3, 383-414

Abstract: It is most important for monetary policy to track the natural rate of interest when interest rates take large and sustained swings away from their long‐run equilibrium values. Here, we study two models: a standard New Keynesian model and one in which government bonds provide liquidity. Policy rules that cannot track the natural rate perform poorly in both models, but are especially bad in the second because of sustained movements in the natural rate induced by fiscal shocks. First difference rules, on the other hand, do surprisingly well. When model uncertainty is taken into account, the dominance of the first difference rule is even more pronounced.

Date: 2015
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https://doi.org/10.1111/jmcb.12180

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Chapter: Monetary policy and the natural rate of interest (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:47:y:2015:i:2-3:p:383-414

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