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Natural equilibrium real interest rate estimates and monetary policy design

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  • Philip Arestis
  • Georgios Chortareas

Abstract

Practical monetary policy concerns and recent theoretical developments have revived interest in the concept of a "natural" equilibrium real interest rate. The natural real interest rate is potentially an important concept for monetary policy makers and some researchers have suggested that the concept of a "real interest rate gap" can be used to evaluate the stance of monetary policy or even set policy. Obtaining an estimate for the equilibrium real interest rate, however, is not straightforward, and the existence of alternative approaches to this task generates uncertainty about those estimates. In this paper, we discuss some conceptual, policy, and modeling issues pertaining to the U.S. equilibrium interest rate. Such issues include the distinction between "natural" and "neutral" real interest rates, the determination of the natural real interest rate in an open economy context, the different ways that productivity may affect the natural equilibrium real interest rate, and the sensitivity of theoretical measures of the natural equilibrium real interest rates to various parameterizations.

Suggested Citation

  • Philip Arestis & Georgios Chortareas, 2007. "Natural equilibrium real interest rate estimates and monetary policy design," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(4), pages 621-643.
    • Handle: RePEc:mes:postke:v:29:y:2007:i:4:p:621-643
    DOI: 10.2753/PKE0160-3477290405
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    2. Angel Asensio, 2007. "Inflation targeting drawbacks in the absence of a 'natural' anchor," Post-Print halshs-00189225, HAL.
    3. Pan, Wenrong & Xie, Tao & Wang, Zhuwang & Ma, Lisha, 2022. "Digital economy: An innovation driver for total factor productivity," Journal of Business Research, Elsevier, vol. 139(C), pages 303-311.
    4. Jens Klose, 2012. "Political business cycles and monetary policy revisited–an application of a two-dimensional asymmetric Taylor reaction function," International Economics and Economic Policy, Springer, vol. 9(3), pages 265-295, September.
    5. repec:hal:spmain:info:hdl:2441/5221 is not listed on IDEAS
    6. Jens Klose, 2011. "Political Business Cycles and Monetary Policy Revisited – An Application of a Two-Dimensional Asymmetric Taylor Reaction Function," Ruhr Economic Papers 0286, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. Ansgar Belke & Jens Klose, 2012. "Modifying Taylor Reaction Functions in Presence of the Zero-Lower-Bound – Evidence for the ECB and the Fed," Ruhr Economic Papers 0343, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    8. repec:zbw:rwirep:0343 is not listed on IDEAS
    9. repec:spo:wpmain:info:hdl:2441/5221 is not listed on IDEAS
    10. Angel Asensio, 2011. "Inflation Targeting Drawbacks in the Absence of a ‘Natural’ Anchor: A Keynesian Appraisal of the Fed and ECB Policies from 1999 to 2006," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 11, Edward Elgar Publishing.
    11. repec:zbw:rwirep:0286 is not listed on IDEAS

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