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Pedersen, Jesper
Year of Publication: 
Series/Report no.: 
Danmarks Nationalbank Working Papers 94
This paper discusses the natural real rate, why and how it reflects the stance of monetary policy, and what can happen if it turns negative; make monetary policy ineffective, which in a situation with a negative output gap can lead to a long period of low growth - secular stagnation. Denmark as a fixed exchange rate regime vís-a-vís the euro and consequently has tied its policy rate to the policy rate in the euro zone. But it can still be interesting to analyse the stance of monetary policy and use it as input in policy recommendations for fiscal policy and other economic policies. Using this as motivation, the natural real rate is estimated using Danish data applying a model for the small-open economy. I find evidence for very low and perhaps negative levels of the natural real rate for Denmark and stronger evidence for a negative trend. It is argued that the negative levels can be expected to be temporary and that imported monetary policy from the ECB already is or will be stimulative in the future as the natural real rate increases. Low levels of the natural rate can remain in the near future leaving an elevated probability of cyclical factors pushing the natural real rate down and hence ending up in the lower bound for monetary policy rate again.
Document Type: 
Working Paper

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