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

41 Pages Posted: 5 Mar 2019

See all articles by Enrico Levrero

Enrico Levrero

Università degli Studi di Roma

Date Written: January 2019

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

JEL Classification: E43; E52; E58; E13; E12; E11

Suggested Citation

Levrero, Enrico, Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment (January 2019). Institute for New Economic Thinking Working Paper Series No. 88 (2019), Available at SSRN: https://ssrn.com/abstract=3346756 or http://dx.doi.org/10.2139/ssrn.3346756

Enrico Levrero (Contact Author)

Università degli Studi di Roma ( email )

Italy

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