TY - JOUR
T1 - Wicksell's Classical Dichotomy
T2 - Is the natural rate of interest independent of the money rate of interest?
AU - Beenstock, Michael
AU - Ilek, Alex
PY - 2010/3
Y1 - 2010/3
N2 - 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.
AB - 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.
KW - Event analysis
KW - Identification
KW - Indexed bonds
KW - Monetary policy
KW - Natural rate of interest
KW - Neutrality of monetary policy
UR - http://www.scopus.com/inward/record.url?scp=76349118561&partnerID=8YFLogxK
U2 - 10.1016/j.jmacro.2009.06.001
DO - 10.1016/j.jmacro.2009.06.001
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AN - SCOPUS:76349118561
SN - 0164-0704
VL - 32
SP - 366
EP - 377
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
IS - 1
ER -