Do Monetary Policy Shocks Affect the Neutral Rate of Interest?

We develop a trend-cycle Bayesian vector autoregression that jointly estimates the real neutral rate of interest, 𝑟 𝑡 * , and identifies monetary policy shocks.As a key innovation, the framework allows cyclical shocks, most notably monetary policy shocks, to affect the trend component of macroeconomic variables, providing a new way to assess whether transitory disturbances have persistent effects.Using external instruments, we find that contractionary monetary policy shocks reduce 𝑟 𝑡 * and lower trend GDP growth, while the model's estimates of 𝑟 𝑡 * remain consistent with standard benchmark measures.We then quantify the contribution of monetary policy shocks to the secular decline in 𝑟 𝑡 * .Although these shocks at times generate sizable movements in 𝑟 𝑡 * , their contribution to the long-run decline is modest, and their net effect on 𝑟 𝑡 * since the early 1990s is slightly positive.We complement these findings with cross-country evidence from other advanced economies, pointing to similar effects.