Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium Framework

Jean-Paul Lam
Authors registered in the RePEc Author Service: Greg Tkacz ()

Staff Working Papers from Bank of Canada

Abstract: In an era when the primary policy instrument is the level of the short-term interest rate, a comparison of that rate with some equilibrium rate can be a useful guide for policy and a convenient method to measure the stance of monetary policy. The real interest rate gap—the difference between the real equilibrium rate and the rate set by the central bank—can thus serve as a leading indicator of future inflationary or deflationary pressures in the economy. The authors estimate equilibrium interest rates for Canada using a sticky-price dynamic stochastic generalequilibrium model. They follow closely the methodology of Neiss and Nelson (2003) and derive measures of the interest rate gap for Canada. Their results indicate that the interest rate gap can be a useful guide for policy and is a good indicator of future output and inflation. The authors also find that their measures of the interest rate gap perform as well as the yield spread, a typical measure of policy stance that is assumed to contain significant information about future economic activity.

Keywords: Interest; rates (search for similar items in EconPapers)
JEL-codes: C32 E37 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004
New Economics Papers: this item is included in nep-dge, nep-fin and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Journal Article: Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-9

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