Finding the Equilibrium Real Interest Rate in a Fog of Policy Deviations. Issue 3 (July 2016)

• Record Type: Journal Article
• Authors: Taylor, John; Wieland, Volker
• Is Part Of: Business economics. Volume 51:Issue 3(2015)
• Page Start: 147
• Page End: 154
• Publication Date: 2016-07
• Subjects: Taylor rule -- equilibrium real rate -- monetary policy; Managerial economics -- United States -- Periodicals; Economics -- United States -- Periodicals; Business -- Periodicals; United States -- Economic conditions -- Periodicals; 338.50973
• DOI: 10.1057/s11369-016-0001-5
• Languages: English
• ISSNs: 0007-666X

Abstract

Abstract A large number of recent papers have endeavored to estimate the current level and trend in the equilibrium real interest rate. A common finding in these studies is that the equilibrium real interest rate has declined in recent years. We show that what appear to be trends in the equilibrium interest rate may instead be trends in other policy variables that affect the economy, and that methods used to adjust monetary policy rules to take account of shifts in the equilibrium interest rate alone are incomplete and misleading because they do not incorporate shifts—such as changes in potential GDP—that are associated with the shifts. Finally, we show that alternative simulation techniques can radically alter the results. We conclude that the estimates of time-varying real equilibrium interest rates that have emerged from recent research are not yet useful for application to current monetary policy.