Eduardo Amaral · 2026 · Working paper
Latest version on SSRN · Policy brief
Can a central bank tighten monetary policy and real interest rates fall? Introducing endogenous capital into the New Keynesian model allows real interest rates to move in either direction at the impact of a positive and persistent monetary policy shock. This raises concerns that the real interest rate channel is only observational — not structural — in these models. This paper demonstrates that the puzzle goes beyond capital. It emerges when the elasticity of an endogenous state variable to a persistent shock is high enough to depress inflation expectations, inducing the endogenous (or systematic) component of the monetary policy rule to sufficiently offset its exogenous component. The channel is indeed structural, but conventional short-run definitions of the natural interest rate (r-star) and the real interest rate gap can be misleading, particularly following events that significantly disrupt investment, such as financial crises or pandemics. As an alternative, sign-consistent gauge of the monetary policy stance, I propose the real interest rate gap that neutralizes the effect of shocks on endogenous state variables. From 1965Q1 to 2023Q3, it was often a better predictor of future inflation and helped to recount the history of monetary policy in the United States.
Amaral, Eduardo (2026). “The Capital Puzzle Is Not About Capital.” Working paper. SSRN 6597968.
@techreport{amaral2026capital,
author = {Amaral, Eduardo},
title = {The Capital Puzzle Is Not About Capital},
year = {2026},
institution = {SSRN},
number = {6597968},
url = {https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6597968}
}
The BIS Working Paper is titled “The capital puzzle” (2025), no. 1288. Please cite the version you use.
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