Estimating a time varying neutral real interest rate for New Zealand

Release date
Olivier Basdevant; Nils Bjorksten; Özer Karagedikli
Published as
Karagedikli, Özer and Kirdan Lees (2007). ‘Do the central banks of Australia and New Zealand behave asymmetrically? Evidence from monetary policy reaction functions’, Economic Record, Wiley, Volume 83(261), Pages 131-142, DOI:
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.