Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/204906
Authors: 
Benati, Luca
Year of Publication: 
2017
Series/Report no.: 
Discussion Papers 17-06
Abstract: 
Since World War I, M1 velocity has been, to a close approximation, the permanent component of the short-term nominal rate. This logically implies that, under monetary regimes which cause inflation to be I(0), permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest. Evidence from the Euro area and several inflation-targeting countries is compatible with this notion, with velocity fluctuations being systematically strongly correlated with a Stock and Watson (1996, 1998) estimate of trend real GDP growth. I exploit this insight to estimate the natural rate of interest for the United Kingdom and Canada under inflation targeting: In either country, the natural rate has been consistently declining since the early 1990s.
Subjects: 
Money demand
Lucas critique
structural VARs
unit roots
cointegration
long-run restrictions: natural rate of interest
Document Type: 
Working Paper

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