Navigating by the Stars: The Role of the “Natural Rates” in Monetary Policy

Tobias Arbogast

Over the past few decades, many central banks have exhibited a strong convergence in their monetary policy, marked by the emergence of a consensus on the goals and limits of monetary policy. The theoretical foundation of this consensus is a blend of New Classical and New Keynesian macroeconomics, while its practical embodiment is independent central banks with narrow mandates primarily focused on price stability. In practice, however, central banks must navigate a complex set of political and economic constraints and exercise a degree of discretion to determine their policy stance. This research aims to investigate the role of the “natural rates“ of unemployment, interest, and output in how central banks conceptualize and implement their monetary policy. These unobservable variables are a crucial yet thorny aspect of modern monetary theory and practice. The dissertation project seeks to shed light on where and how they influence modern monetary policy by employing a comparative research design combining interviews and a quantitative text analysis. The central banks of the eurozone, the USA, Chile, and Argentina will serve as case studies.

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