Do Monetary Policy Shocks Affect the Neutral Rate of Interest?

We develop a Trend-Cycle Bayesian VAR that jointly estimates the real neutral rate of interest, [r], and identifies monetary policy shocks. A key innovation is that cyclical shocks, notably monetary policy shocks, can affect the trend of macroeconomic variables, providing a way to assess whether transitory disturbances have persistent effects. Using external instruments, we find that contractionary shocks reduce [r], and lower trend GDP growth. Although they generate sizable movements, their contribution to the secular decline in [r], is modest and slightly positive since the early 1990s. Cross-country evidence shows similar patterns.