Disentanglement of natural interest rate shocks and monetary policy shocks nexus

Abstract

This paper proposes a novel three-step identification procedure of monetary policy and natural interest rate shocks. Altogether, monetary policy and natural interest shocks explain about 90% of total inflation dynamics. The paper exploits (Arias et al., 2019) procedure, which allows getting canonical impulse response functions to monetary policy shocks. I find no evidence of price and output puzzles. The estimated natural interest rate declines from 2015 to 2019 years. Furthermore, Bank of Russia follows mandate and reacts to inflation in monetary policy feedback rule, while does not respond to output fluctuations.