Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations

Taylor, John B.; Wieland, Volker

doi:10.1057/s11369-016-0001-5

Cited by 54 publications

(43 citation statements)

References 17 publications

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“…However, all of the various macro-based approaches for identifying a new lower equilibrium real rate have several serious potential shortcomings. First, as emphasized by Kiley (2015) and Taylor and Wieland (2016), the macro-based estimates of the natural rate will be distorted by any model misspecifications, especially in the assumed output and inflation dynamics. Kiley, for example, argues that the specification of the output equation in Laubach and Williams is missing a credit spread determinant.…”

Section: Introductionmentioning

confidence: 99%

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

Christensen¹,

Rudebusch²

2018

ERWP

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Researchers have debated the extent of the decline in the steady-state short-term real interest rate-that is, in the so-called equilibrium or natural rate of interest. We examine this issue using a dynamic term structure finance model estimated directly on the prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. Our methodology avoids two pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and potential misspecification of output and inflation dynamics. We estimate that the equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.JEL Classification: C32, E43, E52, G12

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Section: Introductionmentioning

confidence: 99%

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

Christensen¹,

Rudebusch²

2018

ERWP

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“…The traditional Taylor equation is as follows as discussed in Taylor [21] * * ( ) t y t r k k y π ρ π π π = + + − + (2) Where ρ is real interest rate, y is the percent deviation of real GDP from a target, π is rate of inflation, and * π is central bank inflation target. Taylor suggested the coefficient ρ =2, * π =2, y k =0.5 and k π =1.5; however, as emphasized by Taylor and Volker [21] this specification suffers from omitted variables problem or misspecification, particularly when confronted with a shock like Brexit. Therefore they embedded d* into the model that captures possible deviation from the policy implied by the rule.…”

Section: Methodsmentioning

confidence: 99%

Post-Brexit Stock Market Volatility and European Central Bank Reaction Function

Anaraki¹

2018

JFE

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The European stock markets experienced enormous volatility in stock markets post-Brexit era, which wasn't observed before the shock. The volatility in financial markets has disturbed economic fundamentals including capital flow and economic growth in several European countries. To avoid such disturbances the monetary authorities have to implement a monetary reaction function by adopting an appropriate range for short-term interest rate consistent with the volatility of stock markets and depreciation of British pound. The monetary reaction function in this case shouldn't be only based on traditional Taylor's rule but also needs to take into account the volatility of stock markets and depreciation of pound versus major currencies. The goal of this paper is twofold. First, it tries to estimate the effects of Brexit on stock market volatility index for British FTSE, German DAX, and French CAC using econometric models and a dummy variable for post-Brexit. Second, it uses a Vector Auto Regression (VAR) model to stimulate the monetary reaction function of the European Central Bank (ECB) to find out how it may neutralize the adverse effects of stock market volatility on macroeconomic fundamentals. Section 4 discusses the estimated econometric results, and finally section 5 provides findings and conclusions.

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“…In a number of studies the BIS has warned against the repetition of mistakes in the past. Taylor and Wieland (2016) demonstrate evidence that the policy of the Fed contributed to the overheating of the economy. Does the continuation of the policy of extremely low interest rates combined with additional expansionary measures not imply the risk of creating again a situation which turns out to be unsustainable and ending in a collapse of financial markets?…”

Section: Institutional Overburdeningmentioning

confidence: 95%

Central Banks – from Overburdening to Decline?

Issing¹

2017

Wirtschaftspolitik Im Wandel

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Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations

Cited by 54 publications

References 17 publications

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

Post-Brexit Stock Market Volatility and European Central Bank Reaction Function

Central Banks – from Overburdening to Decline?

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