Regulation and the Neo‐Wicksellian Approach to Monetary Policy

Abstract

Laubach and Williams (2003) employ a Kalman filter approach to jointly estimate the neutral real federal funds rate and trend output growth using an IS relationship and an output‐gap‐based inflation equation. They find a positive link between these two variables, but also much error surrounding neutral real rate estimates. We modify their approach by including variables for regulations on deposit interest rates and on wages and prices. These variables are statistically significant and notably affect estimates of two policy‐relevant coefficients: the sensitivity of output to the real interest rate and that of inflation to the output gap.