TAILIEUCHUNG - The neutral real interes t rate

The main contribution of this paper is that it applies a new measure for competition, called the Boone indicator (see also Boone, 2001; Bikker and Van Leuvensteijn, 2008; Van Leuvensteijn et al., 2007). The basic notion underlying this indicator is that in a competitive market, more efficient companies are likely to gain market shares. Hence, the stronger the impact of efficiency on market shares is, the stronger is competition. Further, by analyzing how this efficiency-market share relationship changes over time, this approach provides a measure which can be employed to assess how changes in competition affect the cost of borrowing. | The neutral real interest rate Tom Bernhardsen senior adviser and Karsten Gerdrup senior economist Monetary Policy Department Norges Bank1 The concept neutral real interest rate is generally associated with the real interest rate level which implies that monetary policy is neither expansionary nor contractionary. We define the neutral real interest rate as the real interest rate level which in the medium term is consistent with a closed output gap. We consider in more detail how the neutral real interest rate in a small open economy is influenced by global conditions. The neutral real interest rate cannot be observed and estimates are uncertain. Different methods for estimating the neutral real interest rate are presented in this article. An overall assessment implies that it will normally lie in the range of about 2 -3 per cent in Norway. In recent years with low real interest rates globally we cannot exclude the possibility that the neutral real interest rate in Norway may be even lower. The neutral real interest rate has probably been falling since the 1980s and early 1990s partly as a result of lower inflation risk premia. 52 1 Introduction The interest rate is the most important monetary policy instrument. It may be set so that monetary policy is expansionary contractionary or neutral. The concept neutral real interest rate is generally associated with the real interest rate level which implies that monetary policy is neither expansionary nor contractionary. If the central bank aims to stimulate economic activity the interest rate must be set so that the real interest rate is lower than the neutral rate. If the central bank aims to dampen activity the interest rate must be set so that the real interest rate is higher than the neutral The concept neutral real interest rate stems from the Swedish economist Knut Wicksell3 who maintained about a hundred years ago that the general price level would rise or fall indefinitely as long as the real interest rate

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