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Money as Indicator for the Natural Rate of Interest

Money as Indicator for the Natural Rate of Interest by Helge Berger
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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.
International Monetary Fund; January 2012
52 pages; ISBN 9781463992248
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Title: Money as Indicator for the Natural Rate of Interest
Author: Helge Berger; Henning Weber
 
ISBNs
1463992246
9781463930554
9781463944360
9781463992248