Monetary policy

The uncertainty surrounding the natural rate of interest

The equilibrium or natural rate of interest is a key benchmark for determining whether a central bank’s monetary policy is accommodative (official rates lower than the natural rate) or restrictive (higher than the natural rate). However, one disadvantage of the natural rate is that it is not directly observable in the data, meaning that it needs to be estimated using economic models. The problem lies in the fact that the results of such estimations depend on which variables are included in the model, and what relationships are assumed to exist...