Estimating a time varying neutral real interest rate for New Zealand

Release date
01/02/2004
Reference
DP2004/01
Authors
Olivier Basdevant; Nils Bjorksten; Özer Karagedikli
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.