Hidden Bibliographic Details
| Varying Form of Title: | At head of title: European Department
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| Other authors / contributors: | Weber, Henning, author.
International Monetary Fund. European Department, issuing body.
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| ISBN: | 9781463930554
1463930550
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| Notes: | Title from PDF title page (IMF Web site, viewed January 11, 2012).
"January 2012."
Includes bibliographical references (pages 39-42).
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| Summary: | 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.
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