The Real Interest Anchor for the Price-based Monetary Policy
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| Title | The Real Interest Anchor for the Price-based Monetary Policy
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| Author | Li Hongjin, Su Naifang and Hong Hao |
| Organization | Operations Office, PBC；Research Institute, PBC |
| Email | leehongjin@163.com；sunf013@126.com；haohong755@hotmail.com |
| Key Words | Natural rate of interest; Potential output; Price-based monetary policy; State space model |
| Abstract | The accelerating pace of interest rate liberalization in China has signified the importance and urgency of the central bank to turn to priced based monetary policy. As the anchor in the price based monetary policy, the Natural Rate of Interest provides an essential benchmark in the interest control of the central bank. In this article, according to Laubach and Williams(2003), with consideration of the long run economic growth relationships shown in the neoclassical growth Ramsey model, we construct a state space model based on New Keynesian general equilibrium model to estimate the natural rate of interest of China. The results show that natural rate of interest is a leading indicator to the GDP growth, and could interpret and forecast the economic growth trend. Meanwhile, the real interest rate gap is an inflation indicator and is helpful in making and evaluating the monetary policy. Generally, the natural rate of interest plays an important role in price-based monetary policy transformation and macro-economy policy under the New Normal. |
| Serial Number | WP910 |
| Time | 2015-08-07 |
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