Money as Indicator for the Natural Rate of Interest

53 Pages Posted: 31 May 2012

See all articles by Helge Berger

Helge Berger

International Monetary Fund (IMF)

Henning Weber

Deutsche Bundesbank

Date Written: January 2012

Abstract

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.

Keywords: Natural Interest Rate, Money Demand, Optimal Monetary Rule, Economic Models, Interest Rates

Suggested Citation

Berger, Helge and Weber, Henning, Money as Indicator for the Natural Rate of Interest (January 2012). IMF Working Paper No. 12/6, Available at SSRN: https://ssrn.com/abstract=888157

Helge Berger (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Henning Weber

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

HOME PAGE: http://www.bundesbank.de/en/henning-weber

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