Wicksell's Classical Dichotomy: Is The Natural Rate Of Interest Independent of the Money Rate of Interest ?

Michael Beenstock (msbin@mscc.huji.ac.il) and Alex Ilek
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Michael Beenstock: Hebrew University of Jerusalem

No 2005.04b, Bank of Israel Working Papers from Bank of Israel

Abstract: Proponents of Taylor Rules assume that the natural rate of interest is independent of the rate of interest set by the central bank. We use data for Israel to test this hypothesis. We proxy the natural rate of interest by the forward yield to maturity on indexed linked treasury bonds. If the null hypothesis is false it is difficult to suggest persuasive instruments that would identify the causal effect of the money rate on the natural rate of interest. Our identification strategy is therefore built around natural experimentation and event analysis. Large and seemingly exogenous shocks to monetary policy have no measurable effect on the natural rate of interest according to nonparametric and parametric tests. Therefore Wicksell's Classical Dichotomy is empirically valid.

Pages: 36 pages
Date: 2005-12
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Citations: View citations in EconPapers (2)

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https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2005.04b.pdf First version, 2005 (application/pdf)

Related works:
Journal Article: Wicksell's Classical Dichotomy: Is the natural rate of interest independent of the money rate of interest? (2010)
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