The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation?

This paper examines the time-varying policy neutral interest rate in real time for the Czech Republic in 2001:1--2006:09, estimating various specifications of simple Taylor-type monetary policy rules. For this reason, we apply a structural time-varying parameter model with endogenous regressors. The results indicate that the policy neutral rate gradually decreased over the sample period to levels comparable to those in the euro area. Next, we propose a measure of the monetary policy stance based on the deviation of the actual interest rate from the estimated policy neutral rate and find it a useful predictor of the level as well as the change of the future inflation rate.