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Estimating Time Varying Neutral Real Interest Rate

Estimating a time varying neutral real interest rate in New Zealand
By Olivier Basdevant, Nils Björksten and Özer Karagedikli February 2004

The interest rate which corresponds to neutral monetary policy settings in New Zealand appears to have trended downwards since at least the stabilisation of inflation in 1992.

We present several alternative estimates of a time varying neutral real interest rate (NRR) in state space models, which all show the same declining trend.

We then test for a relationship between the Neo-Wicksellian real interest rate gap and future inflation. As in Neiss and Nelson (2003), these two are highly correlated.

To read the paper click on the link below...

http://www.rbnz.govt.nz/research/discusspapers/dp04_01.pdf


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