DP13978 Riders on the Storm

Author(s): Óscar Jordá, Alan M. Taylor
Publication Date: September 2019
Keyword(s): Kalman filter, monetary policy stance, neutral rate of interest, state-space model
JEL(s): E43, E44, E52, E58, F36, N10
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13978

Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country's rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control.