Working Paper

Money as Indicator for the Natural Rate of Interest

Authors

  • Helge Berger
  • Henning Weber
Publication Date

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 comoves 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.

Info

JEL Classification
E31, E32, E41

Key Words

  • money demand
  • Natural interest rate
  • optimal monetary rule