Comments On 'A Spectral Perspective on Natural Interest Rates in Asia-Pacific

Book excerpt: Feng Zhu (2015) has delivered sound research on the equilibrium real interest rate and its implication for monetary policy in Asia-Pacific countries. I fully concur that the use of the natural interest rate framework to implement monetary policy poses many risks, given the numerous uncertainties surrounding natural rates. However, we should not only consider the precision of estimation but we should also seek to understand how different factors in different situations influence the equilibrium real interest rate and why this is important for monetary policy formulation. Here, I see some room for enhancement that should be incorporated in the paper. My suggestion is that the paper could discuss a broader scope of the monetary policy domain, especially in the post-GFC era, such as the trade-off between internal-external balances, the role of the exchange rate as well as risk perception/behaviour that could potentially impact the equilibrium real interest rate lift-off, as in the case of Indonesia, Malaysia, and some other emerging countries. This would provide a more rigorous assessment of the strategic role of interest rate policy and thus the practical relevance of equilibrium real interest rates in monetary policy formulation.Given the practical usefulness of equilibrium real interest rates, I generally support the arguments proffered by Orphanides and Williams (2002) that recommend against relying excessively on these intrinsically noisy indicators when making monetary policy decisions, and Hamilton et al (2015) who inject more inertia into the monetary policy reaction function. To conclude the discussion on this issue and anchor the theme of the conference, namely “expanding the boundaries of monetary policy”, we should put a proper weight on interest rate policy along with other instruments under a credible central bank policy mix strategy. This implies that the equilibrium real interest rate estimation should not statistically stand alone, since the determination of equilibrium real interest rates should be consistent with the macroeconomic balance and the related policy mix response. Consequently, while there is no guarantee that structural estimates would fare better, I would prefer to address the issue using a structural approach.