Wicksell's Classical Dichotomy: Is the natural rate of interest independent of the money rate of interest?

Michael Beenstock*, Alex Ilek

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

According to Wicksell's Classical Dichotomy the money rate of interest depends on the natural rate of interest, but the latter does not depend on the former. If this Classical Dichotomy is false monetary policy may induce hysteresis because the natural rate of interest would depend upon the money rate of interest. We use data for Israel to test Wicksell's Classical Dichotomy. We proxy the natural rate of interest by the forward yield to maturity on indexed-linked treasury bonds. If the null hypothesis is false it is difficult to suggest persuasive instruments that would identify the causal effect of the money rate on the natural rate of interest. Our identification strategy is therefore built around quasi-experimentation and event analysis. Large and seemingly orthogonal shocks to the natural rate of interest have no measurable effect on the natural rate of interest according to non-parametric and parametric tests. Therefore, Wicksell's Classical Dichotomy is empirically valid.

Original languageEnglish
Pages (from-to)366-377
Number of pages12
JournalJournal of Macroeconomics
Volume32
Issue number1
DOIs
StatePublished - Mar 2010

Keywords

  • Event analysis
  • Identification
  • Indexed bonds
  • Monetary policy
  • Natural rate of interest
  • Neutrality of monetary policy

Fingerprint

Dive into the research topics of 'Wicksell's Classical Dichotomy: Is the natural rate of interest independent of the money rate of interest?'. Together they form a unique fingerprint.

Cite this