Munich Personal RePEc Archive

Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation

Olmos, Lorena and Sanso Frago, Marcos (2014): Natural Rate of Interest with Endogenous Growth, Financial Frictions and Trend Inflation.

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Abstract

Given the unobservable quality of the natural rate of interest, the consequences of central banks using an incorrect value in the monetary policy rule are analyzed in a New Keynesian DSGE model with endogenous growth, financial frictions and trend inflation. Our results confirm the financial structure plays a key role in the determination of the natural rate of interest and show that the mismeasurements affect the long-run growth rate by modifying the actual inflation rate trend, which is different from the target. Finally, we develop a mechanism to monitor the accuracy of the natural rate estimate.

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