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Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment

Enrico Levrero ()

No 88, Working Papers Series from Institute for New Economic Thinking

Abstract: Starting with the literature on the estimates of the natural rate of interest, this paper critically analyzes the modern practice of identifying the benchmark rate of monetary policy with an equilibrium or neutral interest rate reflecting `fundamental forces` unaffected by monetary factors. After briefly mentioning the determinants of the natural rate of interest in the New- Keynesian models, the paper discusses the different notions of it that we find in these models and the problems encountered when the natural rate is estimated. It states that these problems are not only related to the difficulties in distinguishing the kind and persistency of economic shocks, but pertain to theory, namely to model specification and the alleged independence of the average or normal interest rate from monetary policy. Following Keynes`s suggestion regarding the monetary nature of interest rates, some final remarks will thus be advanced on their effects on prices and income distribution as well as on the objectives and stance of monetary policies.

Keywords: Natural rates of interest; Structural and semi-structural models; Monetary policies; Taylor-rule; Interest rates and income distribution (search for similar items in EconPapers)
JEL-codes: E11 E12 E13 E43 E52 E58 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2019-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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Journal Article: Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment (2021) Downloads
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