Money As Indicator for the Natural Rate of Interest

Helge Berger and Henning Weber

No 2012/006, IMF Working Papers from International Monetary Fund

Abstract: The natural interest rate is of great relevance to central banks, but it is difficult to measure. We show that in a standard microfounded monetary model, the natural interest rate co-moves with a transformation of the money demand that can be computed from actual data. The co-movement is of a considerable magnitude and independent of monetary policy. An optimizing central bank that does not observe the natural interest rate can take advantage of this co-movement by incorporating the transformed money demand, in addition to the observed output gap and inflation, into a simple but optimal interest rate rule. Combining the transformed money demand and the observed output gap provides the best information about the natural interest rate.

Keywords: WP; money gap; monetary policy; Natural interest rate; money demand; optimal monetary rule; gap coefficient; observed output gap; interest rate rule; policy rule; Demand for money; Output gap; Consumption; Monetary policy frameworks; Productivity (search for similar items in EconPapers)
Pages: 52
Date: 2012-01-01
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Citations: View citations in EconPapers (1)

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