The Role of the Natural Rate of Interest in Monetary Policy

BIS Working Paper No. 171

24 Pages Posted: 20 Sep 2007

Date Written: March 2005

Abstract

This paper examines the role of the natural rate of interest in the conduct of monetary policy. The natural rate figures prominently in many theories of the business cycle and of inflation fluctuations, and therefore has the potential to play a key role in monetary policy given the current mandates of many central banks. However, the presence of financial imperfections and measurement uncertainty draw into question whether estimates of the natural rate can be reliable indicators of excess demand pressures. Natural rate-based theories may, nonetheless, provide useful guidance in the formulation of desirable monetary policies.

Keywords: Real interest rate, interest rate rules, Wicksell, New Keynesian models, financial imperfections

JEL Classification: E21, E31, E32, E43, E52

Suggested Citation

Amato, Jeffery D., The Role of the Natural Rate of Interest in Monetary Policy (March 2005). BIS Working Paper No. 171. Available at SSRN: https://ssrn.com/abstract=699221 or http://dx.doi.org/10.2139/ssrn.699221

Jeffery D. Amato (Contact Author)

Goldman Sachs International ( email )

United States

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