ABSTRACT
It is hypothesized that if the central banks in inflation-targeting countries want to reduce inflation, they set the policy interest rate above the natural interest rate (Wicksell, 1898). However, is unobservable. It has been estimated econometrically. The natural rate exists in the New Keynesian model as a statistic, that is, an empirical calculation that depends solely on observable data and not at all on estimated model parameters. Here, we derive the natural rate of interest from a structural micro-foundation model and compute it for the advanced countries in our sample. depends on the consumption–leisure growth rates relative to capital–labor growth rates. It is zero in the steady state because all the growth rates are zero. However, the wider the gap, the higher is. When consumption–leisure ratio grows faster (slower) than the capital–labor ratio, tends to increase (decrease). The data and our calculations show that current monetary policy (as in November 2022) may be – on average – tighter than what is predicted by our calculations in Australia, Denmark, New Zealand, Sweden, the United Kingdom, and the United States. This may suggest that these central banks have higher estimates of the natural rates; have no estimates at all; or they are strongly overreacting to the unexpectedly high inflation.
